Paychex, Inc. (PAYX) isn’t a company that’s typically on the tongues of stock analysts and investors, but it sure is this year. PAYX is beating the pants off the market — and competitor Automatic Data Processing (ADP) — with 14% gains, and is trading at decade-plus highs.
But better yet for new money: This payroll and human resources provider looks set to be among 2016’s most exciting stocks.
Investors can thank a strengthening job market, solid fundamentals and management’s innovative expansion efforts that include both acquisitions and new service offerings.
The November jobs report, which saw payrolls expand at a promising pace, implies general improvement in the state of the U.S. economy. That steady job growth — particularly for small- and medium-sized companies –has helped PAYX remain at the top of the payroll services industry. A strengthening job market means more employers will require payroll processing services, as well as human resources assistance.
Plus, confusion and complications involving Obamacare have been a boon for Paychex stock.
2015 marked the first year in which non-payroll services accounted for more than $1 billion in revenue, as an increasing number of PAYX clients require assistance navigating the new, often-complicated health insurance reforms.
Paychex Continues to Expand Through Acquisitions
Last week, PAYX announced its acquisition of Advance Partners, an Ohio-based human resources solutions provider focused on temporary staffing companies. Paychex CEO Martin Mucci stated, “Given Paychex’s extensive product suite, financial strength, and access to capital, we can help expand Advance Partners’ product offering and accelerate client growth.”
Combining the resources and client bases of Paychex and Advance Partners will allow PAYX to provide a wider array of products and services to the 7,500 temporary staffing companies currently working with Advance Partners. Plus, Paychex can further capitalize on this acquisition through the introduction and upselling of newly designed services to Advance Partners’ customers. Specifically, small business lending — which accounts for roughly half of Advance Partners’ revenue — offers significant potential, thanks to synergy with PAYX current services.
While PAYX has some stiff competition from ADP, Paychex’s top line has been growing more quickly. Further, in a survey conducted by BestPayrollServices.com, PAYX was ranked No. 2 (above No. 3-ranked ADP) on the list of the best services providers in the industry for the month of December.
Clearly, management has been successful in its efforts to acquire new business and deliver services clients actually want.
Paychex Stock Fundamentals
As far as fundamentals are concerned … well, growth is there. Recently, PAYX reported that it grew earnings to 52 cents per share this quarter, up from 47 cents in the year-ago period, and management expects EPS growth of 7.84% for 2016.
Additionally, Paychex carries no debt (and hasn’t for the past decade), and has performed better than the S&P 500 over the past 10 years, “highlighting that financial engineering by adding leverage isn’t necessarily needed for solid returns,” according to CNBC. And considering PAYX’s ability to generate cash, not having debt service offers substantial opportunity for further acquisitions, stock buybacks and/or dividend increases.
Speaking of which, Paychex stock currently yields more than 3% on a payout that has been elevated by 20% since the beginning of 2014.
Paychex is scheduled to report earnings again on Dec. 22, so obviously any significant changes from what we know right now would merit another look at PAYX.
But for now, PAYX looks like an unsexy but solid addition to just about any portfolio in 2016.
As of this writing, Greg Gambone did not hold a position in any of the aforementioned securities.
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