Paychex, Inc. (PAYX): How to Play the Data Processing Sector

Competition

Since Paychex, Inc. (NASDAQ:PAYX) seems a bit expensive, let’s see if there is a better play. The leader in payment processing is Automatic Data Processing (NASDAQ:ADP), so let’s take a look at that one. Also worth considering is Intuit Inc. (NASDAQ:INTU), which isn’t exactly an apples-to-apples comparison, but they do make the software for businesses that want to do their payroll and accounting on their own, such as QuickBooks and TurboTax.

Automatic Data Processing (NASDAQ:ADP), known simply as ADP, is the largest payroll and data processing service provider in the world, serving about 570,000 customers all over the world. ADP has a very similar pattern of revenue growth to Paychex in that it had been stagnant for a while, and is just now beginning to show real growth. ADP is also projected to grow its revenues quicker than Paychex in the near future, with 6.5% growth next year (FY 2014) as opposed to about 4% for Paychex, Inc. (NASDAQ:PAYX). ADP trades at a very similar P/E of 23.3, and is expected to grow earnings at a slightly quicker pace of 8% annually due to the expected revenue growth combined with higher margins.

Intuit Inc. (NASDAQ:INTU) is one of the most well-known makers of accounting and personal finance software, with QuickBooks being almost a requirement for small businesses. Intuit also makes TurboTax, which I personally rely on each year as a do-it-yourself tax filer. Intuit Inc. (NASDAQ:INTU) seems like the best bargain in this group, at just under 20 times TTM earnings, but with a much better 12% forward growth rate projected, due to the increased success of small businesses in the improving economy, as well as the increasing number of people who decide to do their own taxes.

Buy, Sell, or Hold?

As I mentioned, Intuit Inc. (NASDAQ:INTU) is the best bargain in the group, and although it is not a direct comparison to the other two, it does merit consideration if you are considering an investment in the payroll small business services space. As far as Paychex, Inc. (NASDAQ:PAYX) (and ADP) goes, with shares up about 15% so far in 2013, I would need for the stock to pull back to a more reasonable valuation in order to be a buyer.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Automatic Data Processing (NASDAQ:ADP), Intuit Inc. (NASDAQ:INTU), and Paychex, Inc. (NASDAQ:PAYX). The Motley Fool owns shares of Intuit Inc. (NASDAQ:INTU).

The article How to Play the Data Processing Sector originally appeared on Fool.com.

Matthew is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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