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Why Is Paychex (PAYX) Down 10.5% Since Last Earnings Report?

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A month has gone by since the last earnings report for Paychex (PAYX - Free Report) . Shares have lost about 10.5% 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 catalysts.

Paychex Q4 Earnings Meet and Revenues Beat Estimates

Paychex reported decent fourth-quarter fiscal 2018 results, wherein earnings came in line with the Zacks Consensus Estimate while revenues surpassed the same.

Adjusted earnings per share came in at 61 cents, which increased 13% on a year-over-year basis. The bottom-line figure benefited from the tax reform policy. Notably, Paychex enjoyed a lower income tax rate of 28.7% in the reported quarter compared with 35% in the year-ago quarter.

Revenues of $871.1 million surpassed the Zacks Consensus Estimate by $3.5 million and improved 9% year over year. Revenues at Payroll service and Human Resource Services (HRS) increased in the quarter. Interest on Funds Held for Clients surged as well.

Revenues in Detail

Payroll service revenues totaled $452.4 million, up 3% year over year. The improvement was driven by growth in revenue per check resulting from price increases, net of discounts.

Human Resource Services (HRS) revenues climbed 17% year over year to $401 million, mainly owing to a rise in client bases across the company’s human capital management (HCM) services that includes comprehensive HR outsourcing services, comprising HROI, time and attendance, retirement services and insurance services.

Paychex’s largest HRS revenue stream — Paychex HR Services — includes the company’s professional employer organization (PEO) and administrative services organization. Increased demand for these services led to double-digit growth in the number of client worksite employees on a year-over-year basis.

Retirement services revenues benefited from rise in asset fee revenue 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.

Furthermore, interest on fund held by clients improved 27% year over to $17.7 million on the back of higher average interest rates earned. 

Operating Performance

Paychex’s total expenses rose 11% from the year-ago quarter to $553.3 million on the account of continued growth in PEO business, increased compensation and one-time bonus to non-management employees. Total expenses, as a percentage of total revenues, increased 90 basis points (bps) to 62.6%.

Adjusted operating income was up 6% year over year to $317.8 million. However, adjusted operating margin contracted 90 bps to 36.5%, chiefly due to increased total expenses as a percentage of revenues.

Balance Sheet

Paychex exited fiscal fourth quarter with cash, cash equivalents and corporate investments of $424.2 million compared with $421.2 million at the end of the prior quarter. The company has no long-term debt. For fiscal 2018, it generated operating cash flow of $1.3 billion.

Paychex repurchased 2.5 million shares for $143.1 million and paid dividend of $739.7 million during fiscal 2018.

Fiscal 2019 Outlook

Total revenues are expected to grow in the range of 6-7%. Payroll Services’ revenues are anticipated to be within in the 2-3% band. Human Resource Services revenues are projected to grow in the 10-11% range. Interest on funds held for clients is envisioned to grow in the band of 15-20%.

Operating margin is anticipated to be roughly 37%. Adjusted net income is likely to increase in the range of 11-12%. Adjusted earnings per share are estimated to be up approximately 11%. Effective income tax rate is projected to be approximately 24%.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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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