Can Paychex (PAYX) Surprise This Earnings Season? - Analyst Blog

Paychex Inc. PAYX is expected to report third-quarter fiscal 2014 results after the market closes on March 26. In the last quarter, it delivered +2.38% earnings surprise. Let's see how things are shaping up for this announcement.

Factors to Consider

Paychex provides payroll and human resource HR outsourcing services to small and medium-sized businesses (SMBs). Its offerings include comprehensive payroll services, including payroll processing, payroll tax administration and employee pay services.

We remain encouraged by the company's investments in product development and focus on building its sales force to support revenue growth. In our view, the company's expansionary initiatives through joint ventures and acquisitions should bode well for its long-term growth strategy.

Product launches are also expected to provide additional support. Moreover, Paychex's focus on SMBs looking for HR solutions could provide the company with opportunities.

However, unfavorable interest rates and stiff competition from Automatic Data Processing ADP and Insperity NSP remain the possible headwinds for the company.

Earnings Whispers?

Our proven model does not conclusively show that Paychex is likely to beat earnings estimate this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. This is not the case here as you will see below.

Zacks ESP: Both the Most Accurate estimate and the Zacks Consensus Estimate currently stand at 42 cents. Thus, the ESP is 0.00%.

Zacks Rank: Paychex carries a Zacks Rank #3 (Hold) which when combined with a 0.00% ESP makes surprise predictions difficult.

We caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.

Another company that you may want to consider as our model shows that it has the right combination of elements to post an earnings beat is:

Carnival Corp. CCL, Earnings ESP of +25.0 % and a Zacks Rank #2 (Buy).