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Bull of the Day: Paychex (PAYX)

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Paychex (PAYX - Free Report) is a leading provider of integrated human capital management solutions for HR, payroll, employee benefits and retirement plans, and business insurance services.

Through its HCM software-as-a-service platform, Paychex Flex, provides an integrated product suite that covers the employee life cycle from recruiting and hiring to retirement.

Paychex, with a market cap north of $42 billion and sales projected to grow to $4.5 billion this fiscal year -- a 10.7% advance -- was founded in 1971 with an insight by B. Thomas Golisano. From the company website...

"Payroll is complex for small and medium-sized businesses and Paychex can make it simple. We were the original disruptors, starting small but thinking big."

Golisano started the company with $3,000 and a credit card. He served as its president and Chief Executive Officer from 1971 to October 2004 and was the Chairman of Paychex until CEO Marty Mucci recently took that role.

Paychex boasts these metrics as the #2 HR/payroll provider in the world:

**700,000+ clients in the U.S. and Northern Europe
**Pays 1 in 12 U.S. private sector employees
**Largest HR company for small to medium-sized businesses

Serving more than 90,000 401(k) plans, Paychex has been recognized as the largest 401(k) recordkeeper in the U.S. by PLANSPONSOR magazine for the tenth consecutive year.

Paychex reported strong Q2 fiscal 2022 (ends May) results in late December. Adjusted earnings of 91 cents per share beat the Zacks Consensus Estimate by 15.2% and increased 25% on a year-over-year basis. Total revenues of $1.11 billion beat the consensus mark by 4.6% and increased 13% year over year.

Revenues in Detail
                 
Revenues from Management Solutions increased 14% year over year to $832 million. The segment benefited from higher checks per payroll for HCM services and net gain in worksite employees for HR solutions, higher revenue per client resulting from improved price realization, improved market conditions on asset-based revenues for retirement services, and increase in funding for temporary staffing clients.

Professional employer organization ("PEO") and Insurance Solutions' revenues were $262.4 million, up 11% from the year-ago quarter. The uptick was due to an increase in the number of average worksite employees, impact of an increase in average wages per worksite employee, higher revenues on state unemployment insurance, plus a rise in PEO health insurance revenues.

Fiscal 2022 View

For fiscal 2022, total revenues are now expected to register 10-11% growth compared with the prior expectation of 8%. Adjusted earnings per share are now expected to register 18-20% growth compared with the prior expectation of 12-14%.

Management Solutions' revenues are now expected to grow 10-11% compared with the prior expectation of 8%.

Adjusted operating margin is expected to be almost 39-40% compared with the prior expectation of 38-39%. Adjusted EBITDA margin is now expected to be nearly 44% compared with the prior expectation of 43%.

Analyst Reactions

One of the most bullish calls after the quarter was from Credit Suisse, who raised their price target on PAYX shares to $165 from $135.

Analyst Kevin McVeigh reiterated his bullish views on the stock as improving fundamentals plus product offerings fuel record-high retention and likely structurally higher margin levels. Importantly, Paychex boosted its full year 2022 outlook for the second time in as many quarters.

And more recently during the stock market correction, Cowen & Co. issued an analyst note saying that PAYX was the "right stock for right now."

Cowen analyst Bryan Bergin upgraded Paychex to Outperform from Market Perform with a price target of $145, up from $130. The analyst sees a "confluence of company-specific and market-driven factors" that make Paychex "an attractive compounder" in the current market.

Paychex has strengthened fundamentals and a detachment from growth factor pressure, Bergin told investors in a mid-January research note. The analyst forecasts "healthy upside" to consensus estimates thru fiscal 2024, supported by successful product development, sales momentum and a strong financial profile.

CEO Marty Mucci on Mad Money

After the company report, Jim Cramer asked Marty Mucci "How are you guys doing it?"

Mucci acknowledge the tailwinds of economic and job growth as naturally adding to their business. But he also praised his sales teams for providing more solutions to more clients.

And, not surprisingly, he beamed about near record retention of clients. That makes sense if they are serving small and medium-sized businesses well because an HR/HCM/Benefits system should feel like home. Plus, they are doing it well by offering the best technology and automations to streamline HCM functions.

Cramer also asked about why Retirement is such a growth area and Mucci explained that just as people have higher standards for their job search in terms of benefits, they also seek the best services and tools at the end of their tenure. If Paychex can be the already-trusted custodian for that smooth transition, they keep those retired workers in the family.

Finally, we're coming into another season for workers where automation can help prevent headaches and Paychex has this reminder posted on the website: "Jan. 31 is deadline to furnish W-2s to employees. Administrators and employees also can access through self-service."

During this pullback, keep your eye on spots to buy PAYX under Monday's low near $115 down to the Sep 30 gap up from $108.


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