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Paychex (PAYX) Down 2.2% Since Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Paychex, Inc. (PAYX - Free Report) . Shares have lost about 2.2% in that time frame.

Will the recent negative trend continue leading up to its next earnings release, or is PAYX due for a breakout? 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 drivers.

Paychex Beats Q3 Earnings Estimates, Updates '18 View

Paychex reported solid results for third-quarter fiscal 2018, wherein the top and the bottom lines came ahead of the respective Zacks Consensus Estimate. Moreover, the company registered year-over year improvement on both counts.

The company reported non-GAAP earnings per share of 63 cents, which beat the Zacks Consensus Estimate by a penny and grew 15% year over year. The upside mainly stemmed from higher revenues, partially offset by increased expenses.

Quarter Details

Paychex reported total revenues (including interest on funds held for clients) of $866.5 million, up 9% year over year. Excluding interest on funds held for its clients, total services revenues (Payroll service and Human Resource Services) increased 8% year over year to $848.4 million. The Zacks Consensus Estimate was pegged at $588 million.

Payroll Service segment revenues went up 2% from the year-ago period to $455 million, primarily on the back of higher revenues per check.

Human Resource Services segment revenues rose 17% year over year to $393.4 million, chiefly driven by strong growth in client base and worksite employees, elevated revenues from retirement, as well as online HR administration services.

Interest on funds held for clients increased 37% on a year-over-year basis to $18.1 million, mainly benefiting from higher average interest rates earned.

Paychex’s total expenses flared up 17% from the year-ago quarter to $574 million due to increased compensation, one-time bonus to non-management employees and a one-time expense related to termination of certain license agreements. Total expenses, as a percentage of total revenues, increased 470 basis points (bps) to 66.2%.

The company’s operating income declined 5% year over year to $292.5 million. In addition, Paychex’s operating margin contracted 470 bps to 33.8%, chiefly due to higher total expenses as a percentage of revenues.

Net income came in at $260.4 million, up from $202.5 million reported in the prior-year quarter.

Balance Sheet & Cash Flow

Paychex exited fiscal third quarter with cash, cash equivalents and corporate investments of $421.2 million compared with $338.6 million recorded at the end of the previous quarter. The company has no long-term debt. For the first three quarters of fiscal 2018, the company generated operating cash flow of $989.9 million.

During the first three quarters, Paychex repurchased 1.6 million shares for $94.1 million.

Guidance

The company updated guidance for fiscal 2018.

Total revenues are now expected to grow around 7%, up from 6% projected earlier.

Payroll Services Revenues are anticipated to increase 2%. Previously, growth between 1% and 2% was anticipated.

Human Resource Services revenues are now projected to grow in the range of 13-14% compared with the earlier forecast of 12-14% growth.

Interest on funds held for clients is expected to grow in the range of 20% to 25%, up from the previous projection of mid-to-upper-teen range.

Operating margin is anticipated to be 38%, down from earlier range of 39-40%. Effective income tax rate is projected to be in the band of 28.5% to 29%, down from 35.0% to 35.5% projected earlier.

Net income is likely to advance 13% year over year on a GAAP basis and 15% on a non-GAAP basis. Previously, growth of 5% and 7% on GAAP and non-GAAP basis, respectively, was projected.

GAAP earnings are likely to increase in the range of 13-14%.

Non-GAAP earnings per share are estimated to be up in the range of 15-16%, up from the previous estimate of 7-8%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been six revisions higher for the current quarter compared to five lower.

Paychex, Inc. Price and Consensus

 

Paychex, Inc. Price and Consensus | Paychex, Inc. Quote

VGM Scores

At this time, PAYX has an average Growth Score of C. Its Momentum is doing a lot better with an A. 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.

Our style scores indicate that the stock is more suitable for momentum investors than growth investors.

Outlook

Estimates have been trending upward for the stock and the magnitude of these revisions indicates a downward shift. Interestingly, PAYX has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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