While businesses evolve, the strategy of outsourcing remains a fundamental method for organizations to make their operations more efficient and save money. In the global business environment, outsourcing has changed from being just about cost reduction into strategic cooperation that allows access to specialized skills and promotes creativity.
The transformation continues, and in 2024, we might see a change of era in how organizations use external resources. In light of this, we look into Cintas Corporation (CTAS) and Paychex, Inc. (PAYX). Before delving into the featured stocks, let's examine the industry dynamics.
The pandemic had a huge impact on employment. With arrangements for work from home, companies worldwide accessed the possibility of gaining access to a large talent pool without concerns about documentation and operational expenses.
The boundaries of outsourcing are expanding in terms of geography, with a rise in worldwide workforce cooperation. Businesses are using talent resources from all over the world and encouraging teamwork between teams located in various parts of the planet.
This movement is aided by better communication methods, project handling systems, and the increasing approval for distant jobs. Using different skills from different places allows organizations to push innovation and keep up with competition.
In addition, Automatic Process Automation (RPA) is ready to change the outsourcing industry dynamics. More and more organizations are putting automation into their processes, using software robots for handling typical, repeated duties. Not only does this enhance efficiency, but it also brings down error chances.
Also, industry analysts are forecasting big growths in IT and outsourcing spending by 2024. Some predictions even go into double digits. The surges in AI use case development, cloud migration, security investments and platform modernization are some leading factors that fuel these forecasts.
According to Statista, the IT outsourcing industry made more than $460 billion in revenue during 2023. At the same time, Grand View Research reveals that the global market for business process outsourcing was worth around $280.64 billion in 2023 and it's expected to grow up to approximately $525.20 billion by 2030 at a CAGR of 9.4%.
In terms of price performance, CTAS has climbed 9.2% over the past month, while PAYX plunged 1.1% during the same period. Moreover, CTAS gained 13.1% over the past three months, closing the last trading session at $685.64, whereas PAYX grew 2.1% during the same period, closing the last trading session at $121.53.
But which outsourcing stock could be a better pick? Let's find out.
Latest Developments
In its fiscal 2024 third quarter release, CTAS reported better-than-anticipated financial performance. The firm is now increasing its annual revenue guidance from around $9.48-$9.56 billion to a new range between approximately $9.57-$9.60 billion. Moreover, EPS is expected to fall in the range of $14.80-$15.00, up from the previous estimate of $14.35-$14.65.
On January 19, PAYX announced a strategic plan to augment shareholder value by allowing the purchase of up to $400 million in common stock, which started on February 1. The action exhibits confidence in the company's projected growth and emphasizes its dedication to optimizing capital allocation for enduring success.
Recent Financial Results
In the third quarter of fiscal 2024, which ended February 29, 2024, CTAS’ total revenue increased 9.9% year-over-year to $2.41 billion. Its operating income rose 16.6% from the year-ago value to $520.80 million. Moreover, net income and EPS grew 22% and 22.3% from the prior year’s period to $397.58 million and $3.84, respectively.
During the second quarter of fiscal 2024, which ended November 30, 2023, PAYX’s total revenue rose 5.7% year-over-year to $1.26 billion. Its adjusted EBITDA increased 6.2% from the year-ago value to $551 million. Moreover, adjusted net income and adjusted EPS both grew 9% from the previous year’s quarter to $391.60 million and $1.08, respectively.
Past and Expected Financial Performance
Over the past three years, CTAS’ revenue and EBITDA increased at a CAGR of 10.9% and 14.7% respectively. Moreover, the company’s net income and EPS rose at respective CAGRs of 15% and 16.6% over the same time frame.
For the fiscal year ending May 2024, analysts expect the company’s revenue to increase 8.8% year-over-year to $9.59 billion. Likewise, its EPS for the ongoing year is expected to grow 15.5% from the previous year to $15.00.
Over the past three years, PAYX’s revenue and EBITDA rose at a CAGR of 9.1% and 11.8%, respectively. During the same period, the company’s net income and EPS increased at a 15.5% and 15.4% CAGR, respectively,
The consensus revenue estimate of $5.32 billion for the fiscal year ending May 2024 reflects a 6.3% year-over-year increase. Additionally, the company’s EPS for the same period is expected to grow 10.3% from the prior year to $4.71.
Profitability
CTAS’ trailing-12-month revenue is 1.8 times that of what PAYX generates. Moreover, CTAS is more profitable, with a trailing-12-month return on total assets (ROTA) of 17.51% compared to PAYX’s 14.09%. Similarly, CTAS’ trailing-12-month asset turnover of 1.07x compares with PAYX’s 0.48x.
Valuation
In terms of trailing-12-month Price/Sales, CTAS is trading at 7.01x, 16.2% lower than PAYX’s 8.37x. Moreover, CTAS’ trailing-12-month EV/Sales of 7.29x is 11.5% lower than PAYX’s 8.24x.
Thus, CTAS is more affordable.
POWR Ratings
CTAS has an overall rating of B, which equates to Buy in our proprietary POWR Ratings system. Conversely, PAYX has an overall rating of C, translating to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. CTAS has a B grade for Momentum, consistent with the stock trading above its 50-day and 200-day moving averages of $620.47 and $544.26, respectively.
But for PAYX, it has a C grade or Momentum. This is in line with the fact that its stock trades below the 50-day moving average at $121.89 but above its 200-day one which stands at $119.50.
Of the 41 stocks in the B-rated Outsourcing - Business Services industry, CTAS is ranked #14, whereas, PAYX is ranked #26.
Beyond what we've stated above, we have also rated both stocks for Growth, Value, Stability, Sentiment, and Quality. Click here to view CTAS ratings. Get all PAYX ratings here.
The Winner
With companies increasingly turning toward outsourcing to expedite operations, both CTAS and PAYX could benefit from the current industry dynamics. However, CTAS’ superior financial performance in its most recent quarter, better profitability and discounted valuation could position it as a better buy than PAYX.
Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy. You can view all the top-rated stocks in the Outsourcing - Business Services industry here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
CTAS shares rose $4.26 (+0.62%) in premarket trading Thursday. Year-to-date, CTAS has gained 14.02%, versus a 10.41% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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