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Paychex (PAYX) Up 3.5% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for Paychex (PAYX). Shares have added about 3.5% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Paychex due for a pullback? 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 Earnings & Revenues Beat Estimates in Q2

Paychex reported solid second-quarter fiscal 2020 results wherein both earnings and revenues surpassed the Zacks Consensus Estimate.

Adjusted earnings of 70 cents per share outpaced the consensus estimate by 2.9% and increased 8% on a year-over-year basis. Total revenues of $990.7 billion beat the consensus mark by 0.4% and increased 15% year over year.

The company witnessed solid growth in its human resource (“HR”) outsourcing services, time and attendance solutions and retirement services.

Revenues in Detail

Revenues from Management Solutions increased 6% year over year to $726.7 million. Growth was driven by increase in the company’s client base and revenue per client. Under Management Solutions, retirement services’ revenues benefited from an increase in the asset fee revenues earned on the asset value of participants’ funds.

PEO and insurance services revenues were $244.1 million, up 57% from the year-ago quarter. The uptick was driven by contribution from Oasis acquisition and growth in clients and client worksite employees across the company’s PEO business. Insurance Services revenue growth was due to rise in the number of health and benefit clients and applicants, partially offset by softness in the workers’ compensation market as state insurance fund rates declined.

Furthermore, interest on funds held for clients increased 9% year over year to $19.9 million on higher realized gains, average investment balances and average interest rates.

Operating Performance

Operating income increased 11% year over year to $341.7 million. However, operating income margin declined to 34.5% from 35.8% in the year-ago quarter. EBITDA of $398.8 million improved 16% year over year. EBITDA margin of 40% was flat year over year.

Balance Sheet & Cash Flow

Paychex exited second-quarter fiscal 2020 with cash and cash equivalents of $600.6 million compared with $586.4 million at the end of the prior quarter. Long-term debt of $796.6 million was flat year over year. Cash provided by operating activities was $269.8 million in the reported quarter. During the reported quarter, the company paid out $222 million in dividends.

Fiscal 2020 View

For fiscal 2020, Paychex expects PEO and insurance services revenues to register 25-30% growth compared with the prior guided growth rate of 30%. Management solutions revenues are anticipated to register 5-5.5% growth compared with the prior guided growth rate of 5%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

Currently, Paychex has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. 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.

Outlook

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



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