Paychex (PAYX) Q4 Earnings: What's In Store For The Stock?

Paychex Inc. (NASDAQ:PAYX) is set to report fourth-quarter fiscal 2016 results on Jun 30. Last quarter, the payroll and human resource solutions provider’s earnings were in line with the Zacks Consensus Estimate.

In the past four quarters, the company has outperformed the Zacks Consensus Estimate twice and matched the same on two occasions. This represents an average positive earnings surprise of 0.98%.

PAYCHEX INC Price and EPS Surprise

PAYCHEX INC Price and EPS Surprise | PAYCHEX INC Quote

Let’s 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 boosting sales force to drive revenues. We also believe that the company’s expansion initiatives, including joint ventures and acquisitions, are in sync with its long-term growth strategy.

One of the key secular growth drivers for 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, growing regulatory burden on small companies underscores increasing need for outsourcing non-core activities.

The company continues to capitalize on this opportunity by regularly introducing new products and services for upselling 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 concerns. Moreover, intensifying competition in the outsourcing space from major players like Automated Data Processing Inc. (NASDAQ:ADP) and Insperity could add to its 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 49 cents. Hence, the difference is 0.00%.

Zacks Rank: Although Paychex’s Zacks Rank #2 increases the predictive power of ESP, its 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 a negative estimate revisions momentum.

Stocks to Consider

Here are a couple of stocks that you may consider as our model shows that they have the right combination of elements to post an earnings beat in their upcoming releases:

Synergy Resources Corporation (NYSE:SYRG) , with an Earnings ESP of +50.00% and a Zacks Rank #2.

Worthington Industries, Inc. (NYSE:WOR) , with an Earnings ESP of +9.52% and a Zacks Rank #2.