4-Star Stocks Poised to Pop: Paychex

Based on the aggregated intelligence of 170,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, payroll and personnel services provider Paychex (Nasdaq: PAYX  ) earned a respected four-star ranking.

With that in mind, let's take a closer look at Paychex's business and see what CAPS investors are saying about the stock right now.

Paychex facts

Headquarters (founded) Rochester, N.Y. (1971)
Market Cap $10.32 billion
Industry Data processing and outsourced services
Trailing-12-Month Revenue $2.02 billion
Management

CEO Martin Mucci (since September 2010)

CFO John Morphy (since October 1996)

Return on Equity (average, past 3 years) 37.7%
Cash/Debt $450.1 million / $0
Dividend Yield 4.3%
Competitors

Automatic Data Processing (Nasdaq: ADP  )

Administaff (NYSE: ASF  )

Sources: Capital IQ (a division of Standard & Poor's) and Motley Fool CAPS.

On CAPS, 96% of the 1,404 members who have rated Paychex believe the stock will outperform the S&P 500 going forward. These bulls include StockTradingFool and All-Star Nittany95, who is ranked in the top 5% of our community.

Just a few months ago, StockTradingFool noted that Paychex "is one of only two major companies who provide payroll and HR services to small and mid-sized businesses." Our CAPS member concludes: "It currently pays a 4.8% dividend and has no debt, and its business should take off as the economy recovers." Since that pitch was written, the stock has risen, pushing the dividend yield down.

Paychex's massive scale, focus on small- to mid-sized businesses (ADP shoots for the big fish), and high customer retention rates drive cash flows that are too tough for Fools to ignore. In fact, Paychex's three-year average cash king margin (28.2%) is higher than that of payroll services foes ADP (16.9%) and Administaff (3.3%).

CAPS All-Star Nittany95 elaborates on the bull case:

They will benefit from three trends -- 1) a pickup in employment, particularly by small business, 2) a continued move toward outsourcing of administrative duties by HR departments, and 3) Inflation/rising interest rates. The first two will drive top-line growth in their main businesses. The Third will growth in their interest income on funds held for clients. While the turmoil in the current credit markets is delaying the pickup in rates, it will eventually happen. When it does, [Paychex] growth will far outpace the rest of the industry. Add to the growth a solid balance sheet and you have a pure play winner.

What do you think about Paychex, or any other stock for that matter? If you want to retire rich, you need to put together the best portfolio you can. Owning exceptional stocks is a surefire way to secure your financial future, and on Motley Fool CAPS, thousands of investors are working every day to find them. CAPS is 100% free, so get started!

Fool contributor Brian Pacampara owns no position in any of the companies mentioned. Paychex is a Motley Fool Inside Value pick, and Motley Fool Options has recommended a write covered straddle position on it. ADP is a selection of Income Investor. Try any of our Foolish newsletter services free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Fool's disclosure policy always gets a perfect score.


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