Paychex, Inc.

’s

PAYX

shares have charted a solid trajectory in recent times, appreciating a massive 59.4% over the past year, ahead of the 51.1% rally of the

industry

it belongs to and 55.6% rise of the Zacks S&P 500 composite.

What’s Supporting the Rally?

Paychex has grown meaningfully over the years by providing industry-leading service and technology solutions to its clients and their employees. Its solid business model, diversified products and services, and strategic acquisitions have boosted top-line growth.

Notably, revenues grew at a five-year (2016-2021) CAGR of 6.5%. Higher revenues will expand margins and increase profitability in the long run.

Paychex’s total-debt-to-total-capital ratio at the end of second-quarter fiscal 2021 was 0.22, much lower than the industry’s 0.36. A low debt-to-capitalization ratio indicates lower risk of insolvency in challenging times. Further, the company’s cash and cash equivalent balance of $927 million at the end of the quarter was above the total debt level of $804 million, underscoring that the company has enough cash to meet its debt burden.

Paychex puts consistent efforts to reward its shareholders through dividends and share repurchases. The company paid dividends of $889.4 million, $826.8 million and $739.7 million, and repurchased shares worth $171.9 million, $56.9 million and $143.1 million, respectively, in fiscal 2020, 2019 and 2018.

Hurdles to Counter

Paychex is seeing increase in expenses as it continues to invest in sales, marketing, product development and supporting technology. PEO insurance costs, which include workers’ compensation and minimum premium health insurance benefit plans, also add to the company’s expenses.

Total expenses of $2.58 billion increased 7% year over year in fiscal 2020. These expenses increased 15% year over year in fiscal 2019, 10% in fiscal 2018 and 6% in fiscal 2017.

Zacks Rank and Stocks to Consider

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

Some better-ranked service stocks are

ExlService


EXLS

,

Gartner


IT



and


Blucora



BCOR

, each carrying a Zacks Rank #2 (Buy). You can see


the complete list of today’s Zacks #1 Rank stocks here



.

The long-term expected earnings per share (three to five years) growth rate for ExlService, Gartner and Blucora is pegged at 9.4%, 13.5% and 15%, respectively.

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