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Why Is Paychex (PAYX) Down 7.6% Since Last Earnings Report?

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It has been about a month since the last earnings report for Paychex (PAYX - Free Report) . Shares have lost about 7.6% in that time frame, underperforming the S&P 500.

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

Paychex Surpasses Q1 Earnings & Revenues Estimates

Paychex reported better-than-expected first-quarter fiscal 2021 results.

Adjusted earnings of 63 cents per share beat the Zacks Consensus Estimate by 12.5% but decreased 11.3% on a year-over-year basis. Total revenues of $932.2 billion beat the consensus mark by 4.1% but decreased 6% year over year.

Quarterly results were affected as businesses continue to be impacted by the COVID-19 pandemic. However, the company enjoyed solid client retention and increasing sales performance. The company remains focused on investing in its business along with cost-cutting initiatives.

Revenues in Detail                  

Revenues from Management Solutions decreased 5% year over year to $687.4 million. The downfall was due to a decline in check volumes, partially offset by increased penetration of retirement services. The decrease in check volumes was owing to a reduction in the number of clients processing payrolls and the number of employees paid due to the shutdown.

Professional employer organization (“PEO”) and Insurance Solutions revenues were $229.9 million, down 7% from the year-ago quarter. The downfall was due to a decline in the number of clients’ worksite employees. Insurance Solutions revenues were impacted by lower workers’ compensation premiums, driven by reduced wages and related premium rates.

Interest on funds held for clients decreased 28% year over year to $14.9 million on lower average investment balances, average interest rates, and realized gains. Funds held for clients’ average investment balances were impacted by lower client fund collections and changes in client base mix, partially offset by wage inflation and timing of collections and remittances.

Operating Performance

Adjusted operating income decreased 10% year over year to $315.2 million. Adjusted operating margin fell to 33.8% from 35.2% in the year-ago quarter.

Adjusted EBITDA of $365.3 million decreased 9% year over year.

Balance Sheet & Cash Flow

Paychex exited first-quarter fiscal 2021 with cash and cash equivalents of $835.7 million compared with $905.2 million at the end of the prior quarter. Long-term debt was $796.9 million compared with $796.8 million in the prior quarter. Cash provided by operating activities was $215 million in the reported quarter.

During the reported quarter, the company paid out $223.2 million in dividends and repurchased 0.4 million shares for a total of $28.8 million.

Fiscal 2021 View

For fiscal 2021, total revenues are expected to decline 2-4% compared with the prior guidance of 2-5%. Adjusted earnings per share are anticipated to fall 6-8% compared with the prior guidance of 6-10%. Adjusted operating margin is expected around 35% compared with the prior-guided range of 34-35%. Adjusted EBITDA margin is expected to be around 40% compared with the prior-guided range of 39-40%.

Paychex expects PEO and insurance services revenues to decline 2-5% compared with the prior guidance of 2-7%. Management solutions revenues are anticipated to decline 1-3% compared with the prior guidance of 1-4%. Interest on funds held for clients is expected to be between $55 and $65 million.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month.

VGM Scores

Currently, Paychex has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Charting a somewhat similar path, 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 F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. 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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