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Paychex (PAYX) Earnings & Revenues Beat Estimates in Q2

Zacks Equity Research

Paychex, Inc. PAYX 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.

So far this year, shares of Paychex have rallied 30.8% compared with 28.3% growth of the industry it belongs to and 26.1% increase of the Zacks S&P 500 composite.

 

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.

Paychex, Inc. Price, Consensus and EPS Surprise

Paychex, Inc. Price, Consensus and EPS Surprise

Paychex, Inc. price-consensus-eps-surprise-chart | Paychex, Inc. Quote

 

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%.

Zacks Rank & Other Stocks to Consider

Currently, Paychex carries a Zacks Rank #2 (Buy).

Some other top-ranked stocks in the broader Zacks Business Services sector are Cardtronics CATM, Global Payments GPN and FactSet Research Systems Inc. FDS. While Cardtronics sports a Zacks Rank #1 (Strong Buy), Global Payments and FactSet Research Systems carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term expected EPS (three to five years) growth rate for Cardtronics and Global Payments, FactSet Research Systems is 4%, 18% and 9%, respectively.

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