Why These “Payroll” Stocks Look Interesting Now

Payroll Stocks Look Interesting NowVery soon we’re going to hear the earnings news straight from the horse’s mouth. Quarterly earnings are beginning to trickle in and even if you aren’t interested in the stocks that you don’t own, corporate reporting is the most important market intelligence you can review.

For years, Paychex, Inc. (PAYX) was one of those companies that continually reported great financial results. It was a growth stock during the technology bubble in the late 1990s, and it made a lot of money for shareholders.

The company hit a wall in terms of its double-digit growth shortly after the technology bubble burst, but what this payroll and benefits outsourcing company has to say about its business conditions is still material to equity investors today.

Recently, Paychex beat the Street by a penny and reported revenue growth in-line with Wall Street consensus.

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The company’s first fiscal quarter of 2015 (ended August 31, 2014), saw its total sales grow nine percent to $667 million, with particular strength in human resources services revenues, which grew 17% comparatively to $244 million during the quarter.

Earnings grew five percent to $171 million (which is very strong profitability per dollar of sales). Earnings per share rose seven percent to $0.47.

Company management recently repurchased 900,000 shares for cancellation during its first fiscal quarter for a modest expenditure of $37.5 million.

The company finished the quarter with cash and total corporate investments of $956 million with no debt. In July, Paychex increased its quarterly dividend nine percent to $0.38 per share.

Overall, it was a pretty good quarter for this mature enterprise. Earnings for its upcoming quarter are expected to grow between six percent and eight percent, with total service revenues expected to be eight percent to 10% greater than the same quarter last year.

The other big company in payroll and benefits administration is Automatic Data Processing, Inc. (ADP), which has been doing incredibly well on the stock market since the beginning of last year. (See “How to Create a Winning Portfolio in a Market at Its Highs.”)

ADP doesn’t report until the end of October, but its top-line growth should be similar to Paychex’s.

ADP has been a good earner for shareholders of late and the stock is still yielding approximately 2.4%. Similarly priced to Paychex in terms of its valuation, I suspect ADP will be able to keep ticking higher on the stock market going into 2015.

The stock would be attractive for new buyers depending on how the company reports its fiscal first quarter of 2015 before the market opens on October 29, 2014.

This stock has doubled since 2010, as institutional investors bet on the economic recovery. ADP reported revenue growth of 10% to $3.1 billion in its fourth fiscal quarter of 2014.

The company’s earnings were $289 million, or $0.60 per diluted share, compared to $224 million, or $0.47 per diluted share. Management expects fiscal 2015 total revenue growth of between seven percent and eight percent.

Paychex’s latest numbers were solid and they bode well for ADP. The company’s share price has been in consolidation all year and its latest numbers will likely be the catalyst for a breakout.