As companies aim for better insight into payroll expenses, outsourcing services provide efficient solutions for managing costs. Additionally, the growing need to cut payroll-related costs is driving the adoption of outsourcing services, offering organizations cost-effective alternatives.

The payroll outsourcing services market is forecast to grow at a CAGR of 4.8% by 2028. Digital transformation drives the market by prompting organizations to modernize their payroll processes with advanced technology and automation. This transformation is essential for improving efficiency, accuracy, compliance, and the overall employee experience.

Against this backdrop, let’s compare two payroll services stocks to analyze which stock is the better investment: Automatic Data Processing, Inc. (ADP) and Paychex, Inc. (PAYX).

The Case for Automatic Data Processing, Inc. Stock

With a $118.85 billion market cap, Automatic Data Processing, Inc. (ADP) engages in the provision of cloud-based human capital management (HCM) solutions worldwide.

It operates in two segments, Employer Services and Professional Employer Organization (PEO). The Employer Services segment offers strategic, cloud-based platforms and human resources (HR) outsourcing solutions. 

ADP’s stock has gained 23.1% over the past six months to close the last trading session at $291.69.

ADP’s 48.11% trailing-12-month gross profit margin is 52.3% higher than the 31.59% industry average. Also, its 7.77% trailing-12-month Return on Total Assets is 46.1% higher than the 5.32% industry average.

ADP’s total revenues for the fiscal first quarter that ended September 30, 2024, increased 7.1% year-over-year to $4.83 billion. Its net earnings stood at $956.30 million, up 11.3% from the prior year’s quarter. Also, its EPS grew 12.5% year-over-year to $2.34.

For the second quarter ended December 2024, ADP’s revenue is expected to increase 6.5% year-over-year to $4.97 million. Its EPS for the ongoing quarter is expected to be $2.30. Moreover, the company surpassed revenue and EPS estimates in all the trailing four quarters, which is impressive.

ADP’s POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

The stock has a B grade for Stability and Quality. ADP is ranked #15 out of 38 stocks in the B-rated Outsourcing – Business Services industry.

In addition to the POWR Ratings I’ve just highlighted, you can see ADP’s ratings for Momentum, Growth, Value, and Sentiment here.

The Case for Paychex, Inc. Stock

Valued at $50.29 billion by market cap, Paychex, Inc. (PAYX) provides integrated Human Capital Management (HCM) solutions for payroll, benefits, Human Resources (HR), and insurance services for small to medium-sized businesses in the United States, Europe, and India. 

Shares of PAYX have surged 18.9% over the past three months but declined 3.3% over the past month to close the last trading session at $139.67.

In terms of the trailing-12-month CAPEX/Sales, PAYX’s 3.07% is 8.5% lower than the 2.83% industry average. However, its 0.48x trailing-12-month asset turnover ratio is 39.4% higher than the 0.78x industry average.

PAYX’s revenue increased 5% year-over-year to $1.32 billion for the fiscal 2024 second quarter that ended November 30, 2024. Moreover, the company’s operations income came in at $538.10 million, up 6% year-over-year, and adjusted earnings per share grew 6% year-over-year to $1.14.

For the third quarter ending February 2025, PAYX’s revenue is expected to increase 4.9% year-over-year to $1.51 billion. Its EPS for the ongoing quarter is expected to grow 7.2% year-over-year to $1.48.

PAYX’s fundamentals are reflected in its POWR Ratings. The stock has an overall C rating, translating to Neutral in our proprietary rating system.

PAYX has a C grade for Momentum, Growth, and Sentiment. It is ranked #19 in the same industry.

Click here for the additional POWR Ratings for PAYX (Value, Stability, and Quality).

ADP vs. Paychex: Which Payroll Services Stock Is the Better Investment?

The continued move toward digitalization and automation in various industries is a key factor driving the payroll services industry. Organizations are increasingly looking for modern payroll solutions that are cloud-based, scalable, and provide self-service features for employees.

Leading payroll services companies ADP and PAYX stand to capitalize on the optimistic industry outlook. However, ADP’s strong profitability might make it the better payroll services stock pick.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Outsourcing – Business Services industry here.

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ADP shares were trading at $287.17 per share on Monday afternoon, down $4.52 (-1.55%). Year-to-date, ADP has declined -1.90%, versus a 1.45% rise in the benchmark S&P 500 index during the same period.

About the Author: Nidhi Agarwal

Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities. More...

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