Paychex (PAYX) Up 5.3% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Paychex (PAYX). Shares have added about 5.3% in that time frame, outperforming 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 the most recent earnings report in order to get a better handle on the important catalysts.

Paychex Q3 Earnings In Line, Revenues Beat Estimates

Paychex’s third-quarter fiscal 2019 earnings matched the Zacks Consensus Estimate while revenues surpassed the same.

Adjusted earnings of 89 cents per share came in line with the consensus estimate and improved 3.5% on a year-over-year basis. Total revenues of $1.07 billion beat the consensus mark by $35.5 million and increased 14.3% year over year.

The company posted strong growth across major human capital management ("HCM") product lines driven by solid performance of human resource outsourcing services, time and attendance solutions, health and benefit insurance and retirement services. The company continued to witness solid demand for its professional employer organization ("PEO") services. New product and mobility application enhancements for clients were unveiled. The company is progressing well with the integration of Oasis. The acquisition of Oasis boosted Paychex’s PEO growth.

Revenues in Detail

Revenues from Management Solutions improved 4% year over year to $801.6 million. The growth was driven by increases in the company’s client bases across many of its services and growth in revenue per check. Under Management Solutions, retirement services revenues benefited from an increase in asset fee revenues earned on the asset value of participants’ funds.

PEO and insurance services revenues were $245.8 million, up 65% 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, partially offset by softness in the workers’ compensation market as state insurance fund rates declined.

Furthermore, interest on fund held by clients increased 27% year over to $23 million on higher average interest rates earned.

Operating Performance

Adjusted operating income increased 7% year over year to $429.3 million. However, adjusted operating income margin declined to 40.1% from 42.9% in the year-ago quarter. Paychex’s total expenses rose 13% from the year-ago quarter to $641.1 million.

Balance Sheet & Cash Flow

Paychex exited fiscal third-quarter 2019 with cash and cash equivalents and corporate investments of $696.4 million compared with $510.6 million at the end of the prior quarter. The company has no long-term debt.

Cash provided by operating activities was $525.6 million in the reported quarter. Capex was $27.2 million.

During the reported quarter, the company paid $201.2 million in dividends.

Fiscal 2019 Outlook

Paychex reaffirmed its guidance for fiscal year 2019. Total revenues (including interest on funds held for clients) are expected to register 6-7% growth. 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

At this time, Paychex has a nice Growth Score of B, a grade with the same score on the momentum front. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. 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 looks promising. Notably, Paychex has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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