Shares of Paychex Inc. PAYX hit a new 52-week high of $54.95 on Jun 2, 2016, eventually closing at $54.94. The stock has delivered a strong one-year return of 14% and a year-to-date return of 3.9%. The average trading volume for the last three months aggregated approximately 1,784K.
Paychex delivered a positive earnings surprise in two out of the last four quarters with an average beat of 0.98%. This Zacks Rank #2 (Buy) company has a market cap of $19.61 billion and a long-term expected earnings growth rate of 9.2%.
What is Driving the Stock Upward?
Paychex is poised to benefit as small and medium businesses (SMBs) have increased outsourcing their HR functions. Further, the SMB segment has shown improvement in the recruitment process as well. We believe that Paychex’s better scale, capital base, regulatory and oversight expertise and institutional knowledge provide it with a competitive advantage.
We are also positive as Paychex continues to invest in SaaS technology and mobile applications by acquiring SaaS-based businesses. Further, the enhancement of mobile technology by adding health and benefits information to its mobile applications will benefit Paychex.
We are optimistic that Paychex might witness growth by successfully cross-selling newer products such as Paychex Premier, Major Market Services (MMS) and ancillary HRS products such as 401(k) record keeping, health insurance sales and workers' compensation administration to the existing client base.
Also, higher adoption of Paychex’s Affordable Care Act (“ACA”) dashboard application that tracks employee count, employee status and health care plan affordability will act as a tailwind for the company.
Going further, we are positive about the SurePayroll acquisition. We believe that the acquisition will help Paychex enhance the overall company’s service offering and increase its market share. SurePayroll’s user-friendly online payroll solutions are specifically targeted at small businesses. Small businesses are a significant source of revenues for Paychex. The acquisition is expected to boost the company’s top line, going forward.
Recently, Paychex reported strong results for third-quarter fiscal 2016 wherein the bottom line matched the Zacks Consensus Estimate while the top line beat the same. Nevertheless, the company marked year-over-year improvement on both the counts.
Furthermore, we are encouraged by Paychex’s investments in product development and focus on building its sales force to support revenue growth. We also believe that the company’s expansionary initiatives, such as joint ventures and acquisitions, support the long-term growth strategy.
Product launches are expected to be the other growth drivers.
However, unfavorable interest rates and competition from Automatic Data Processing ADP and Insperity, Inc. NSP remain concerns.
Other Stocks to Consider
Another stock worth considering in the broder technology sector is DST Systems Inc. DST, which sports a Zacks Rank #1 (Strong Buy).
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