3 Stocks Set to Benefit from a Strong Labour Market

These companies are in demand as workforces expand in both private and government sectors.

Vikram Barhat 8 December, 2021 | 5:28AM
Facebook Twitter LinkedIn

Help Wanted Sign

The recent contraction in unemployment numbers in the U.S. and job growth in Canada are a strong indicator of economic recovery on both sides of the border -  and great news for stocks serving human resources departments.

The job growth trend and workforce expansion for private and government sectors create a ripple effect for companies that directly or indirectly aid the smooth functioning of businesses. This is particularly beneficial for providers of payroll, tax, accounting, and human capital management services.

The following companies are enjoying greater demand for their products and services in an environment of increased regulatory complexity, tighter labour markets, and a growing acceptance of remote or hybrid work arrangements in the wake of the COVID-19 crisis.

 

Paychex Inc

 

Ticker

PAYX

 

Current yield:

2.20%

 

Forward P/E:

34.60

 

Price

US$119.80

 

Fair value:

US$106

 

Value

Fairly valued

 

Moat

Wide

 

Moat Trend

Positive

 

Star rating

***

Data as of Dec 06, 2021

A leading provider of payroll, human capital management, and insurance solutions servicing, Paychex (PAYX) caters to small and midsize clients primarily in the U.S. the company also offers Human Capital Management (HCM) solutions including benefits administration and time and attendance software, as well as human resources outsourcing and insurance brokering.

The wide-moat firm’s full-service HR outsourcing – offered through administrative services organization (ASO) and professional employer organization (PEO) models -- allow businesses to outsource critical HR functions to Paychex, including payroll, compliance, and benefits administration, and access support from onsite HR professionals. 

“Clients can benefit from Paychex's scale to secure competitively priced benefits, allowing them to attract and retain talent and minimize expenses,” says a Morningstar equity report.

Paychex also operates an insurance brokering business and differentiates itself from software-only solutions through its 24/7 customer service support, allowing clients to source advice on HR and compliance matters.

“Paychex's offering appeals to businesses wishing to outsource mission-critical functions, manage and attract employees, and remain compliant with increasingly complex and evolving regulations,” says Morningstar equity analyst Emma Williams.

She forecasts increased regulation, labor market dynamics and remote working trends “will underpin strong demand for Paychex's suite of offerings supporting greater share of wallet and market share gains.”

Paychex is expected to continue to diversify its revenue streams away from payroll through increased focus on HR solutions, including outsourcing and insurance. “By fiscal 2031, we expect payroll revenue will contribute about 40% of total revenue from an estimated 46% in 2021,” projects Williams, who pegs the stock’s fair value at US$106.

 

 

Intuit Inc

 

Ticker

INTU

 

Current yield:

0.42%

 

Forward P/E:

56.18

 

Price

US$647.96

 

Fair value:

US$511

 

Value

27% Premium

 

Moat

Wide

 

Moat Trend

Stable

 

Star rating

**

Data as of Dec 06, 2021

Intuit (INTU) is the giant behind U.S. small-business accounting software QuickBooks and do-it-yourself U.S. tax software TurboTax. The firm controls the majority of U.S. market share for small-business accounting and DIY tax-filing software.

Small business and self-employed segment accounts for just over half of Intuit’s revenue. The segment offers QuickBooks bookkeeping software for small-business and self-employed customers, as well as their accountants. “QuickBooks online has 4.5 million users, and, according to several sources, is estimated to have approximately 80% of the U.S. market share for small businesses using financial software,” says a Morningstar equity report.

TurboTax and QuickBooks online sales have exceeded their respective desktop sales, thus effectively transforming Intuit into a cloud-first company. “Consequently, this has enabled Intuit to leverage customer data to streamline the user experience across disparate products and to natively market its offerings, in turn supporting switching costs and a network effect, which we consider to already be the backbones of Intuit’s wide moat,” says Morningstar equity analyst Julie Bhusal Sharma.

The company has recognized the insecurity customers have in accomplishing the significant tasks of tax filing or business accounting. As a result, for both its small-business and consumer customers, Intuit has launched matchmaking systems. “In accounting, that means matching small businesses with accountants, and in tax, that means adding a human review to the filing process,” says Sharma, who recently lifted the stock’s fair value from US$424 to US$511. 

Both matchmaking mechanisms “pose meaningful opportunity ahead,’ by way of greater customer retention on both sides and higher exposure to the assisted tax market.

 

 

Automatic Data Processing Inc

 

Ticker

ADP

 

Current yield:

1.81%

 

Forward P/E:

34.01

 

Price

US$229.89

 

Fair value:

US$216

 

Value

Fairly valued

 

Moat

Wide

 

Moat Trend

Negative

 

Star rating

***

Data as of Dec 06, 2021

ADP (ADP) is a provider of payroll and human capital management solutions servicing. The firm operates two segments: employer services and the professional employer organization (PEO). The employer services segment offers payroll, HCM solutions, HR outsourcing, insurance, and retirement services. The smaller but faster growing PEO segment provides HR outsourcing solutions to small and midsize businesses through a co-employment model. 

Over the past decade, ADP has been aggressively investing in public cloud native solutions while consolidating its portfolio of disparate platforms. “As of fiscal 2021, ADP has successfully migrated most of its small and midsize clients to its strategic platforms and will be migrating enterprise clients to its new HCM platform over the coming decade,” says a Morningstar equity report.

While platform migrations could ultimately result in higher retention and profitability, the report cautions that forced migrations could prompt enterprise clients to reassess providers, temporarily hindering both metrics.

As well, increasing competitive pressure could result in greater pricing pressure and compel the company to investment heavily to keep its product offering competitive.

Morningstar’s Williams forecasts ADP's price increases will be limited to about 0.5% a year, in line with recent growth but below long-term averages, limiting margin expansion to about 2 percentage points over the next five years.

However, despite facing intense competitive pressure and forcing clients to undergo platform migrations from legacy ADP systems, “the company has maintained high revenue retention and achieved modest operating margin expansion over the past decade,” argues Williams who recently raised the stock’s fair value 7% to US$216, prompted by upgraded medium-term forecasts. 

Get the Latest Stock Insights in Your Inbox

Subscribe Here

Facebook Twitter LinkedIn

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Automatic Data Processing Inc216.88 USD-0.62Rating
Intuit Inc515.99 USD-3.50Rating
Paychex Inc118.77 USD-1.10Rating

About Author

Vikram Barhat

Vikram Barhat  Vikram Barhat is a Toronto-based financial writer specializing in investing, stock markets, personal finance and other areas of the financial services industry. He also writes for CNBC, BBC, The Globe and Mail, and Toronto Star.

© Copyright 2022 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy