Paychex Hits 52-Week High, Expanding Customer Base Holds Key

Shares of Paychex, Inc. (NASDAQ:PAYX) touched a 52-week high of $67.88, eventually closing at $67.31 on Nov 30, 2017. The stock has gained 10.6% year to date, substantially outperforming the 6.1% rally of the industry it belongs to.

The outperformance can be accredited to the company’s expanding customer base and its solid domain expertise in human capital management solutions for payroll, HR, retirement, and insurance services.

Paychex’s sustained focus on investing in product development and enhancing sales force capabilities is helping it to add customers, thereby supporting revenue growth. Notably, revenues witnessed 5-year (2012-2017) CAGR of 7.2%. Higher revenues are likely to expand margins and increase profitability in the long run.

Investors seems to be impressed with Paychex’s latest acquisition of HR Outsourcing Holdings, Inc. (HROI), which has provided it an opportunity to grab market share in the fast growing professional employer organization (PEO) industry. In our opinion, the acquisition is a strategic fit for Paychex as more and more companies are willing to use PEO services rather than creating their in-house HR management departments.

The company’s initiatives to boost revenue growth through acquisitions are encouraging. Since its inception, the company has completed 14 acquisitions. These buyouts have helped Paychex to expand its services as well as global reach, thereby boosting its revenues.
Additionally, the industry in which Paychex operates has huge growth potential. The company mainly focuses on small- and mid-sized businesses looking for HR solutions. Paychex has nearly 605,000 payroll clients but the market is still highly untapped. Per the company, there are about 12 million businesses in the United States under its total addressable market, half of which are still untapped.

Nonetheless, the company has been witnessing lower client retention in the last few quarters, which remains a concern for the near term. Also, current political uncertainty may adversely impact outsourcing decision making in the mid-market, thereby affecting Paychex’s overall growth prospect.

Zacks Rank & Stocks to Consider

Paychex currently carries a Zacks Rank #3 (Hold).

Intel Corporation (NASDAQ:INTC) , IPG Photonics Corporation (NASDAQ:IPGP) and NVIDIA Corporation (NASDAQ:NVDA) are three better-ranked stocks in the broader technology sector. All of them sport a Zacks Rank #1 (Strong Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth for Intel, IPG Photonics and NVIDIA is currently projected to be 8.4%, 19.67% and 11.2% respectively.

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