Paychex Inc. PAYX is set to report third-quarter fiscal 2016 results on Mar 30. Last quarter, the payroll and human resource solutions provider posted a positive earnings surprise of 1.96%. It is worth noting that the company has outperformed the Zacks Consensus Estimate in two out of the preceding four quarters with an average positive earnings surprise of 0.98%.
Let us see how things are shaping up for this announcement.
Factors at Play
We are encouraged by Paychex’s investments in product development and focus on growing its sales force to boost revenues. We also believe that the company’s expansionary initiatives, such as joint ventures and acquisitions, are in tune with its long-term growth strategy.
Further, one of the key secular growth drivers of Paychex is the demand for outsourcing. Human Resource Services outsourcing is a large, less-than-half-penetrated market that offers significant cost-cutting potential. Moreover, the growing regulatory burden on small companies signifies that the need to outsource non-core activities is increasing.
The company continues to capitalize on this opportunity by introducing products and services regularly for upselling to the client base and moving into the mid-market which should aid results in the to-be-reported quarter.
However, sluggish economic growth and a possible rise in interest rates remain the concerns. Moreover, intensifying competition in the outsourcing space from major players like Automated Data Processing Inc. ADP and Insperity may add to the woes.
Earnings Whispers
Our proven model does not conclusively show that Paychex will beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.
Zacks ESP: Both the Most Accurate estimate and the Zacks Consensus Estimate stand at 50 cents. Hence, the difference is 0.00%.
Zacks Rank: Paychex’s Zacks Rank #3, when combined with a 0.00% ESP, makes surprise prediction difficult.
We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Stocks to Consider
Here are a couple of stocks, which you may consider as our model shows that they have the right combination of elements to post an earnings beat in their upcoming releases:
SunEdison Inc. SUNE, with an Earnings ESP of +30.12% and a Zacks Rank #2.
Jarden Corp. JAH, with an Earnings ESP of +2.50% and a Zacks Rank #3.
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