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Revenue Growth, Tax Cuts to Boost Paychex (PAYX) Q1 Earnings

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Paychex, Inc. (PAYX - Free Report) is scheduled to report first-quarter fiscal 2019 results on Oct 2, before market open.

While the top line is likely to benefit from strength in Human Resource Services (HRS), the bottom line is expected to be driven by lower tax rates.

In the past six months, shares of Paychex have gained 19.3%, outperforming the 10.3% rise of the Zacks S&P 500 Composite Index.

 

Top Line Likely to Improve Year Over Year

For HRS revenues,the Zacks Consensus Estimate stands at $393million, indicating a year-over-year improvement of 13.9%. This upside is expected to be driven by a rise in client bases across the company’s human capital management (HCM) services, which includes comprehensive HR outsourcing services, comprising HROI, time and attendance, retirement services and insurance services. In fourth-quarter fiscal 2018, HRS revenues increased 17% year over year to $401 million.

Retirement services revenues are likely to benefit from rise in asset fee revenues earned on the asset value of participants’ funds as well as the number of plans served. Insurance services revenues also increased, courtesy of growth in the number of health and benefit applicants, and higher average premiums for workers’ compensation insurance services.

The consensus mark for Payroll service revenues is pegged at $441 million, reflecting year-over-year decline of 3.7%. In fourth-quarter fiscal 2018, Payroll service revenues increased 3% year over year to $452.4 million.

Further, interest on fund held by clients is expected to increase on the back of higher average interest rates earned. The Zacks Consensus Estimate for this metric is pegged at $16.6 million, reflecting a year-over-year increase of 21.5%. In fourth-quarter fiscal 2018, interest on fund held by clients rose 27% year over year to $17.7 million.

Strength across majority of these categories is likely to contribute to year-over-year growth of Paychex’s total revenues in first-quarter fiscal 2019, the Zacks Consensus Estimate for which is currently pegged at $849.76 million, indicating an increase of 4% year over year. In fourth-quarter fiscal 2018, total revenues of $871.1 million grew 9% year over year.

Paychex, Inc. Revenue (TTM)

 

Paychex, Inc. Revenue (TTM) | Paychex, Inc. Quote

Earnings Likely to Grow on Tax Reform Policy

The U.S. Tax Cuts and Jobs Act (TCJA), which reduced corporate tax rates significantly, should benefit Paychex’s earnings in the to-be-reported quarter. Notably, the consensus estimate for earnings per share (EPS) is pegged at 65 cents, indicating year-over-year growth of 4.8%.

In the fiscal fourth quarter, adjusted earnings rose 13% from the year-ago quarter number to 61 cents per share.

Our Model Suggests a Beat

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. The Sell-rated stocks (Zacks Rank #4 or 5) are best avoided, especially if they have a negative Earnings ESP. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Paychex has an Earnings ESP of +0.90% and a Zacks Rank #2, a combination that increases the odds of an earnings beat.

Key Picks

Here are a few stocks from the broader Business Services sector that investors may consider, as our model shows that these have the right combination of elements to beat on earnings in their respective upcoming releases:

Republic Services (RSG - Free Report) has an Earnings ESP of +0.61% and a Zacks Rank #3. The company is scheduled to report third-quarter 2018 results on Oct 25. You can see the complete list of today’s Zacks #1 Rank stocks here.

Automatic Data Processing (ADP - Free Report) has an Earnings ESP of +0.76% and a Zacks Rank of 3. The company is slated to release first-quarter fiscal 2019 results on Oct 31.

Gartner (IT - Free Report) has an Earnings ESP of +4.50% and a Zacks Rank #3. The company is expected to report third-quarter 2018 results on Nov 1.

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