Paychex (PAYX) is better equipped than most other Wall Street firms when it comes to initiating expansion programs, thanks to the payroll company’s strong cash balance and low debt. These factors, combined with the back-to-back earnings surprises, make it an ideal investment option.
In a deal that could reinforce its dominant position in the human resources management business, Paychex Monday agreed to buy Oasis Outsourcing Acquisition Corp., a privately-held professional employer organization based in West Palm Beach, Florida.
The addition of Oasis is expected to contribute considerably to Paychex’s revenues in the forthcoming quarters by allowing the company to expand to new markets and offer its HR solutions to a larger number of clients. The stock, which currently trades slightly above the levels seen about twelve months ago, continues to maintain the upward trend. It opened Monday’s session higher.
The addition of Oasis is expected to contribute considerably to Paychex’s revenues in the forthcoming quarters
Paychex CEO Martin Mucci said: “This acquisition will strengthen our PEO growth strategy, gain scale for new products with our insurance carrier partners, provide a new client base to offer Paychex retirement and time and attendance products, and augment our experienced management team. This is a great time for our two companies to come together.”
Last month, Credit Suisse raised the stock to outperform from neutral, citing the strength of the company’s payroll service. The management’s continuing efforts to broaden market share and tap the growing demand for HR outsourcing technology, especially among the relatively smaller enterprises, justifies the upgrade.
Prior to the $1.2-billion Oasis buyout, a leading market research firm had upgraded Paychex to strong-buy from buy. Similar upgrades by other analysts and the hike in the target price to the $73-$78 range signal that it is not the right time to sell the stock.
Having recorded a sharp increase in its PEO and insurance service revenues in the first half of the year, Paychex recently predicted up to 20% growth in that business for the full year. The Oasis deal is not expected to have any significant negative impact on the company’s earnings this year. While the management plans to fund the acquisition mostly through cash on hand, it will raise the remaining amount through borrowings.
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