Paychex (PAYX) Poised for Long-Term Growth Despite Risks

A successful portfolio manager is aware of the fact that adding well performing stocks at the right time is of vital importance. Indicators of a stock's bullish run include a rise in its share price and strong fundamentals.

At the moment, Paychex Inc.PAYX can be a good addition to your portfolio. Over the last one year, the Zacks Rank #3 (Hold) stock generated a return of 14.8% compared with a return of 12.5% generated by the Zacks Categorized Outsourcing industry.

What's Driving Paychex?

Paychex posted strong second-quarter fiscal 2017 earnings. Also, on a year-over-year basis, the company registered improvement on both the counts. The company reported earnings per share (EPS) of 56 cents, which beat the Zacks Consensus Estimate by a penny and grew 8% year over year mainly on the back of higher revenues.

Paychex reported total revenue (including interest on funds held for clients) of $771.4 million, up 7% year over year. Moreover, the company's reiterated outlook for fiscal 2017 is encouraging, indicating that it is relatively well placed despite the current macroeconomic sluggishness.

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 expansion initiatives such as joint ventures and acquisitions support the long-term growth strategy.

Product launches are expected to be the other growth drivers. Moreover, Paychex's focus on small- and mid-sized businesses looking for HR solutions could provide growth opportunities.

Paychex is a cash rich company with a strong balance sheet. Cash rich companies not only guarantee protection but are also likely to reward shareholders from their deep cash balances. Paychex generated $1.018 billion of cash from operating activities in fiscal 2016 and exited the second quarter of 2017 with cash, cash equivalents and corporate investments of $293 million. Further, the company generated operating cash flow of $413.4 million during the first two quarters of fiscal 2017. Moreover, since it carries no long-term debt, the cash is available for pursuing strategic acquisitions, investment in growth initiatives and distribution to shareholders.

The stock's long-term earnings per share growth rate is 8.88% and it carries a Momentum Style Score of "A." The company also has an average positive surprise of 1.77%.

However, unfavourable interest rates and competition from Automatic Data Processing ADP and Insperity NSP remain the primary concerns.

A better-ranked stock worth considering in the broader technology sector is Broadcom Limited AVGO , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

Broadcom, which designs, develops and supplies analog and digital semiconductor connectivity solutions, has a long-term EPS growth rate of 13.6%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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