A month has gone by since the last earnings report for Paychex, Inc. (PAYX - Free Report) . Shares have lost about 6% in that time frame, underperforming the market.
Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted 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 Q4 Earnings Top Estimates on Solid Revenues
Paychex reported better-than-expected results for fourth-quarter fiscal 2017, wherein the top and bottom lines came ahead of the respective Zacks Consensus Estimate. Moreover, on a year-over-year basis, the company registered improvement on both the counts.
The company reported non-GAAP earnings per share of $0.54, which beat the Zacks Consensus Estimate by a penny and grew 10% year over year, mainly on the back of higher revenues.
Paychex reported total revenue (including interest on funds held for clients) of $798.6 million, up 6% year over year. Excluding interest on funds held for its clients, total services revenue (Payroll service and Human Resource Services) ascended 6% year over year to $784.6 million. The Zacks Consensus Estimate was pegged at $798 million.
Payroll Service segment revenues went up 2% from the year-ago period to $440.9 million, primarily on the back of higher revenue per check and client base. Also, the acquisition of Advanced Partners contributed 1% to payroll service revenue growth.
Human Resource Services segment revenues rose 10% year over year to $343.7 million, chiefly driven by solid growth in client base and worksite employees, increased revenues from retirement, as well as online HR administration services.
Interest on funds held for clients increased 14% on a year-over-year basis to $14 million, primarily benefiting from higher average interest rates earned.
Paychex’s total expenses flared up 5% from the year-ago tally to $499.7 million due to higher wages and related expenses resulting from increased headcount in operations. However, total expenses, as a percentage of total revenue, contracted 80 basis points (bps) to 62.6%.
The company’s operating income grew 8% year over year to $298.9 million. In addition, Paychex’s operating margin expanded 80 bps to 37.4%.
Net income came in at $195.3 million, up from $178.1 million reported in the prior-year quarter.
Balance Sheet & Cash Flow
Paychex exited the fiscal fourth quarter with cash, cash equivalents and corporate investments of $323.4 million compared with $403.9 million recorded at the end of the previous quarter. The company has no long-term debt. It generated operating cash flow of $960.4 million during fiscal 2017.
During the fiscal, Paychex paid $662.3 million as dividend and repurchased shares worth $166.2 million.
Paychex provided its outlook for fiscal 2018. Management expects Payroll Service revenues to increase year over year in the range of 1–2%, while Human Resource Services revenues are anticipated to grow in a range of 8–10%. Interest on funds held for its clients and investment income are now projected to grow in the mid-to-upper-teen range.
Total revenue is estimated to increase by nearly 5%. This translates to revenues of $3.309 billion.
Operating margin is anticipated to be approximately 40%. Net income is likely to advance 5% year over year on a GAAP basis and 7% on a non-GAAP basis.
Non-GAAP earnings per share are estimated to increase in the range of 7% to 8% which comes to $2.35 – $2.38.
Effective income tax rate is now projected to be in the band of 35.5–36%.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed a downward trend in fresh estimates. There have been five revisions lower for the current quarter.
At this time, Paychex's stock has a poor Growth Score of 'F', however its Momentum is doing a lot better with a 'B'. 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.
Our style scores indicate that the stock is solely suitable for momentum investors.
Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. It's no surprise that the stock has a Zacks Rank #4 (Sell). We expect below average returns from the stock in the next few months.