Most fintech stocks have been beaten in this market, but not all. A fintech that has flown under the radar is Payment (PAYX 4.37%)a company that provides payroll, human resources and benefits outsourcing services to small and medium-sized businesses.
Paychex has not only generated above-market returns, but also has a strong balance sheet, reduced valuation, good margins and excellent growth prospects. Let’s see why this under-the-radar growth stock is worth considering for your portfolio.
Paychex is a regular producer
Paychex is a leading provider of outsourced payroll, benefits and human resources services, focused on small businesses. It has benefited from the changes accelerated by the COVID-19 pandemic in several different ways, including an increase in the number of employees working remotely and the need for companies to create operational efficiencies by outsourcing these functions. In addition, the rise of cloud computing and new technologies has had an impact on growth.
Paychex has been growing steadily, with revenue growing around 9.6% annually over the past 10 years on an annualized basis through June 22. Annualized revenue growth has been even stronger over the past five years, rising 10.8% annually, and that includes a sharp drop when the pandemic first hit.
Most recently, during its fiscal third quarter ending Feb. 28, Paychex showed that its business is growing even in a bear market. In fact, in many ways, it’s thriving in a bear market as more companies seek to outsource these functions, as Chairman and CEO Martin Mucci explained in the earnings report:
While the impacts of COVID-19 are easing, businesses are still operating in a highly complex and volatile environment. The focus is shifting from operational and financial survival at the height of the pandemic to an employee-centric approach, with attracting and retaining talent, remote working and workplace safety being primary concerns.
Paychex generated a 15% year-over-year increase in revenue to $1.26 billion in the quarter, setting a record for new sales revenue. Its operating profit jumped 20% to $562 million and its year-over-year profit rose 23% to $1.19 per share. The stock price is down 14% year-to-date to June 23 and is up 12% over the past 12 months.
Paychex has key advantages
Paychex has benefited from macro trends, but its award-winning Paychex Flex technology platform is another key advantage. The cloud-based platform allows companies to manage payroll, HR and benefits in one location and has helped the company increase sales and retain most of its 710,000 customers. It recently won Best Core HR/Workforce Solution for Small and Medium Businesses for the third year in a row from Lighthouse Research and Advisory.
The company’s finances are also strong, with $1.4 billion in cash and $1.2 billion in operating cash flow. In contrast, it has $885 million in debt and a debt-to-equity ratio of just 0.25. Additionally, it has a healthy operating margin of 40% and, a sign of its operational efficiency, Paychex has a return on equity of 43%.
The company expects to end its fiscal year with revenue up 12% to 13% and earnings per share up 22.5% to 23% from the prior year. The price-to-earnings (P/E) ratio is 31, which is above the industry average of around 22, but is down from 35 a year ago and is around the same level as before the pandemic.
Paychex has been a solid growth stock for years that has flown under the radar, and it continues to thrive in a tough market for growth stocks. Given the market environment and its main strengths, it should be able to gain market share in the years to come.