Jefferies Initiates Coverage Of Payroll Stocks

The U.S. payroll software and services market is worth more than $50 billion, and one Wall Street analyst sees a number of reasons why the space could be a lucrative investment opportunity in the long-term.

The Analyst

On Tuesday, Jefferies analyst Samad Samana initiated coverage of the following payroll stocks:

• Automatic Data Processing ADP - Hold rating, $160 price target.
• Paychex, Inc. PAYX - Hold rating, $75 price target.
• Paylocity Holding Corp PCTY - Hold rating, $88 price target.
• The Ultimate Software Group, Inc. ULTI - Buy rating, $370 price target.

The Thesis

According to Samana, there are several tailwinds in the payroll market these days.

• Analysts are underestimating the massive total addressable market.
• The companies mentioned above have high customer retention rates.
• There's plenty of room for multiple winners in the large market.
• There's a high barrier to entry for new competitors.

“While the focus on software, integration and data is creating winners and losers, the whole group should benefit from rising interest rates, increasing regulatory complexity, and a tight labor market,” Samana said in his note.

Unfortunately for investors, he said the companies under Jefferies’ coverage are all trading near their all-time highest valuations based on forward enterprise value-to-revenue ratio. Samana said he wouldn't be surprised if these stocks take some time to digest recent gains before making another leg up at some point.

The one exception to that rule is Ultimate Software. Samana expects the stock’s earnings multiple to remain stable, but earnings upside over the next four to six quarters should drive the share price higher, he said.

The Benzinga Fintech Summit is the premier gathering of West Coast fintech innovators. The second installment of the event, which takes place Nov. 14 in San Francisco, brings with it a special focus on a maturing fintech sector—the revolutionized lending industry. Click here to learn more!

Related Links:

Q2 13F Roundup: How Buffett, Einhorn, Loeb And Others Adjusted Their Portfolio

Barron's Picks And Pans: Broadcom, Mohawk Industries, NextEra Energy And More