Info Services Stocks Offer Good Value

03/06/2007 12:00 am EST

Focus:

Charles Carlson

Editor, DRIP Investor

Charles Carlson, editor of The DRIP Investor, says two information-service providers—Equifax and Paychex—are well positioned and attractively priced.

Tickers EFX, PAYX

The merger bug has caught one of my [favorite] stocks, Equifax ($38; NYSE: EFX). The company, a provider of credit-verification and transaction-based information services, is acquiring Talx, a provider of human-resources and payroll-related outsourced services, including employment verification. The deal is valued at $1.4 billion and includes the assumption of Talx debt.

Equifax also announced that its board has approved a $400-million share buyback in addition to the current authorization of $383 million. Equifax is down from its 52-week high of $42. The stock could pull back in the near term as a result of the acquisition news. However, I like these shares and believe they are undervalued at current prices.

Equifax has a direct-purchase plan in which any investor may buy stock directly, the first share and every share. Minimum initial investment is $500. Subsequent investments may be as little as $50. I’ve always liked information-services businesses, primarily because of their hefty profit margins.

Another stock involved in this market is Paychex ($40, Nasdaq: PAYX).  The company provides a variety of human-resources services, including payroll processing; payroll-tax administration; employee pay services including direct deposit, and retirement-plan administration.

Net income in the fiscal second quarter ended November 30 rose 18%. The company benefited from a significant increase in income on “funds held for clients.”

Because of the types of services the firm provides businesses, Paychex holds literally billions of dollars for its clients, money that earns interest for Paychex. The firm held an average of $2.9 billion for clients during the quarter. For the period, the firm recorded interest income on these funds of nearly $30 million.

One reason I own Paychex is that it is an excellent way to play continued business creation in the U.S. True, the stock is rarely cheap; these shares currently trade at 30 times the consensus 2007 earnings estimate of $1.41 per share. Thus, Paychex is vulnerable to weakness during market corrections.

Still, I like the company’s business model and its long-term growth prospects and regard it a solid holding for the growth portion of a DRIP portfolio.

It is also quite obvious that Paychex doesn’t mind when short-term rates rise. Higher rates mean higher interest income on funds held for clients, and that can be a big boost to Paychex’s bottom line.

So, Paychex also offers an excellent option for investors looking for a way to hedge a portfolio against rising interest rates. The company offers a direct-purchase plan whereby any investor can buy the first share and every share directly from the company. Minimum initial investment is $250, and Paychex does not charge you a penny to buy stock in its direct-purchase plan.

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