Paychex (PAYX) Hits A New 52-Week High: Should You Hold?

Shares of Paychex Inc. (NASDAQ:PAYX) hit a new 52-week high of $61.50 on Jul 8, 2016, eventually closing at $61.33. The stock has delivered a strong one-year return of 28.4% and a year-to-date return of 15.9%. The average trading volume for the last three months aggregated approximately 2.07M.

This Zacks Rank #3 (Hold) company has a market cap of $22.10 billion and a long-term expected earnings growth rate of 9.4%.

What is Driving the Stock Upward?

On Jun 30, 2016, Paychex reported strong results for fourth-quarter fiscal 2016 wherein the bottom line matched the Zacks Consensus Estimate while the top line beat. Nevertheless, the company marked a year-over-year improvement on both counts.

Earnings of 49 cents per share came in line with the Zacks Consensus Estimate and grew 11.4% year over year mainly on the back of higher revenues.

Paychex reported total revenue (including Interest on funds held for clients) of $753.9 million, up 9% year over year. Moreover, it surpassed the Zacks Consensus Estimate of $751 million. Excluding interest on funds held for its clients, total services revenue (Payroll service and Human Resource Services) grew 9% year over year to $741.6 million.

Moreover, the company issued an optimistic fiscal 2017 guidance, signifying that it is relatively well placed despite the current macroeconomic sluggishness.

For fiscal 2017, management expects 4% year over year increase in Payroll Service revenues. Human Resource Services revenues are likely to grow in the range of 12%–14%. Total service revenue is likely to increase 7%–8%. Interest on funds held for its clients and investment income are projected to grow in the mid-single digit range.

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 its 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.

Going further, we are optimistic that Paychex might witness growth by successfully cross-selling newer products such as Paychex Premier, Major Market Services (MMS) and ancillary HRS products such as 401(k) record keeping, health insurance sales and workers' compensation administration to the existing client base.

Also, higher adoption of Paychex’s Affordable Care Act (“ACA”) dashboard application that tracks employee count, employee status and health care plan affordability will act as a tailwind for the company.

However, unfavourable interest rates and competition from Automatic Data Processing (NASDAQ:ADP) and Insperity, Inc. (NYSE:NSP) remain concerns.

Stocks to Consider

A stock worth considering in the broader technology sector is Stratasys Ltd. (NASDAQ:SSYS) , which sports a Zacks Rank #1 (Strong Buy).