A month has gone by since the last earnings report for Paychex (NASDAQ:PAYX). Shares have added about 4% 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 the most recent earnings report in order to get a better handle on the important catalysts.
Paychex Lags Q4 Earnings Estimates, Revenues Beat
Paychex reported mixed fourth-quarter fiscal 2019 results wherein earnings lagged the Zacks Consensus Estimate but revenues surpassed the same.
Adjusted earnings of 63 cents per share missed the consensus estimate by 2 cents but increased on a year-over-year basis. Total revenues of $980.4 billion beat the consensus mark by $2 million and increased year over year.
The company witnessed solid growth in its human resource (“HR”) solutions administrative services organization with double-digit worksite employee growth and solid sales performance in professional employer organization (“PEO”), retirement, and insurance services. The company also recorded solid client retention and customer satisfaction. The company is progressing well with the integration of Oasis.
Revenues in Detail
Revenues from Management Solutions increased 4% year over year to $694.9 million. The growth was driven by increase in the company’s client base across many of its services and growth in revenue per check (on the back to price increases, net of discounts). Under Management Solutions, retirement services revenues benefited from an increase in the number of plans served and rise in revenues earned on the asset value of participants’ funds.
PEO and insurance services revenues were $263.3 million, up 67% from the year-ago quarter. Clients and client worksite employees increased across the company’s PEO business. Insurance Services revenue growth was driven by 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 fund held by clients increased 25% year over to $22.2 million on higher average interest rates earned.
Operating Performance
Adjusted operating income increased 4% year over year to $314.5 million. However, adjusted operating income margin declined to 32.1% from 35.7% in the year-ago quarter. Paychex’s total expenses rose 22% from the year-ago quarter to $665.9 million.
Balance Sheet & Cash Flow
Paychex exited fiscal fourth-quarter 2019 with cash and cash equivalents and corporate investments of $692.2 million compared with $696.4 million at the end of the prior quarter. The company has no long-term debt. Cash provided by operating activities was $266.7 million in the reported quarter. During the reported quarter, the company paid $222.9 million in dividends and repurchased shares worth $24.1 million.
Fiscal 2020 View
Paychex provided its guidance for fiscal year 2020. Total revenues (including interest on funds held for clients) are expected to register 10-11% growth. The company expects PEO and insurance services revenues to register 30% to 35% growth. Management solutions revenues are anticipated to register 4% growth. Interest on funds held for clients is expected to register 4-8% growth. Effective income tax rate for fiscal 2020 is expected to be in the range of 24-24.5%. Adjusted earnings per share are expected to grow at a rate of 8-9%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -5.07% due to these changes.
VGM Scores
At this time, Paychex has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front 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 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.
Paychex, Inc. (PAYX): Free Stock Analysis Report
Original post