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Paychex (PAYX) Up 5.8% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Paychex (PAYX). Shares have added about 5.8% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Paychex due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Paychex Surpasses Q2 Earnings & Revenue Estimates

Paychex reported strong second-quarter fiscal 2019 results wherein both earnings and revenues surpassed the Zacks Consensus Estimate.

Adjusted earnings of 65 cents per share outpaced the Zacks Consensus Estimate by 2 cents and improved on a year-over-year basis. Total revenues of $858.9 million beat the consensus mark by $2.7 million and increased 7% year over year.

The company posted strong growth across major human capital management ("HCM") product lines driven by solid performance of administrative services organization, retirement services, and time and attendance solutions. The company also witnessed solid demand for its professional employer organization ("PEO") services.

In the quarter, Paychex announced a deal to purchase Florida-based Oasis Outsourcing for $1.2 billion in cash. The acquisition is expected to bolster the company’s PEO growth strategy, expand its PEO sales organization and boost its client base. Further, it is likely to expand Paychex's HR outsourcing and technology-enabled services and help it enter new markets. The combined entity is anticipated to deliver solid human resources and payroll solutions to clients and employees.

Revenues in Detail

Revenues from Management Solutions improved 5% year over year to $685.4 million. The growth was driven by increases in the company’s client bases across many of its services. Acquisition of Lessor Group contributed 1% to growth in Management Solutions revenues in the reported quarter.

PEO and insurance services revenues were $155.2 million, up 15% from the year-ago quarter.  Clients and client worksite employees increased across the company’s PEO business. Insurance Services revenue growth was driven by rise in the number of health and benefit applicants.

Furthermore, interest on fund held by clients increased 31% year over to $18.3 million on higher average interest rates earned. 

Operating Performance

Operating income increased 1% year over year to $307.2 million. However, operating income margin declined 190 basis points to 35.8%.

Paychex’s total expenses rose 10% from the year-ago quarter to $551.7 million on account of continued growth in PEO business, higher compensation-related costs and acquisition of Lessor.

Balance Sheet & Cash Flow

Paychex exited the fiscal second-quarter 2019 with cash, cash equivalents and corporate investments of $759 million compared with $523 million at the end of the prior quarter. The company has no long-term debt.

Cash provided by operating activities was $223.5 million in the reported quarter. Capex was $36.4 million.

During the reported quarter, the paid $201.3 million in dividends.

Fiscal 2019 Outlook

For fiscal year 2019, Paychex reaffirmed its guidance for PEO and insurance services revenues and Management solutions revenues. The company continues to expect PEO and insurance services revenues to register 18% to 20% growth. Management solutions revenues are anticipated to register 4% growth.

Interest on funds held for clients is expected to register 20-25% growth. Effective income tax rate for fiscal 2019 is expected to be approximately 24%. Adjusted earnings per share (non- are expected to grow at a rate of 11-12%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

Currently, Paychex has an average Growth Score of C, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions has been net zero. It comes with little surprise Paychex has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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