Should Investors Buy Stock in These Payroll Processers After Friday’s Jobs Report?

Since the pandemic, the US jobs market has shown admirable resilience and a rapid recovery even among the private sector. When considering the rebound in the jobs market, Automatic Data Processing ADP and Paychex PAYX are two prominent payroll processers that investors may want to keep an eye on.

However, let’s see if it’s time to buy Automatic Data Processing or Paychex’s stock with Friday’s jobs report showing US employers added 206,000 jobs in June which beat most analysts’ expectations of 190,000-195,000 jobs despite dipping from the 218,000 jobs added in May. Furthermore, it’s also important to note that the unemployment rate did rise from 4% to 4.1%, the highest peak since 2021.

Unemployment Rate & Nonfarm Payroll Employment

Image Source: BUREAU OF LABOR STATISTICS

Performance Overview

Despite being two of the leading Human Capital Management (HOM) technology solutions providers, Automatic Data Processing’s stock and Paychex shares are both virtually flat in 2024 and are only sitting on +6% and +2% gains over the last year respectively.

Noticeably lagging the S&P 500 benchmark, the conundrum in their subpar performances may stem from the notion that we could already be at the best-case scenario in terms of the sharp recovery in the US jobs market.

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Attractive Growth Trajectories

Contrary to their stagnant price performances, Automatic Data Processing and Paychex have attractive growth trajectories.

Automatic Data Processing’s total sales are expected to be up 6% in fiscal 2024 and are projected to rise another 5% in FY25 to $20.23 billion. Even better, annual earnings are forecasted to increase 11% this year and are slated to spike another 9% in FY25 to $9.98 per share.

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As for Paychex, its top line is expected to expand 4% in FY24 with total sales projected to rise another 5% in FY25 to $5.82 billion. Plus, 5% EPS growth is forecasted this year with annual earnings projected to increase another 7% in FY25 to $5.33 per share.

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Valuation Comparison

Paychex’s stock trades at 23.5X forward earnings which is roughly on par with the S&P 500 while Automatic Data Processing’s 25.8X is at a slight premium to the benchmark and further above their Zacks Outsourcing Industry average of 16.7X.

In terms of price to sales, Paychex is at a more stretched valuation with a P/S ratio of 7.6X compared to Automatic Data Processing’s 5X. Both stocks are at high sales premiums compared to the industry average of 0.97X although the S&P 500’s P/S average is currently at 5.2X.

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Generous Dividends

Investors love dividends and ADP and PAYX currently have annual dividend yields of 2.36% and 3.34% respectively. This tops the S&P 500’s 1.26% average and slightly edges the broader Zacks Outsourcing Market’s 2.32%.

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Bottom Line

Automatic Data Processing and Paychex stock both land a Zacks Rank #3 (Hold). Quite frankly, today’s jobs report didn’t do enough to suggest the outlook of these payroll processors will continue to strengthen and the valuations of ADP and PAYX suggest there could be better buying opportunities ahead. Still, their current growth trajectories and generous dividends are certainly attractive to long-term investors.

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