Will Revenue Growth Aid Paychex's (PAYX) Earnings In Q2?

Paychex, Inc. (NASDAQ:PAYX) is scheduled to report second-quarter fiscal 2019 results on Dec 19, before market open.

While the top line is likely to benefit from strength across total service revenues and interest on funds held for clients, the bottom line is expected to be driven by lower tax rates.

So far this year, shares of Paychex have declined 3.2% compared with 0.8% rise of the industry it belongs to and 2.7% decline of the Zacks S&P 500 composite.

Top Line Likely to Improve Year Over Year

The Zacks Consensus Estimate for Paychex’s total revenues in second-quarter fiscal 2019 is pegged at $856.73 million, indicating an increase of 3.6% year over year. The top line is likely to benefit from strength across total service revenues and interest on funds held for clients.

Post-adoption of Accounting Standards Codification Topic 606, Paychex classified its total service revenues as Management Solutions revenues, and PEO and insurance services revenues.

Revenues from Management Solutions is expected to be driven by rise in client base across the company’s human capital management (HCM) services — payroll, ASO, retirement services and time and attendance solutions — and contribution from the acquisition of Lessor Group.

The same for PEO and insurance services revenues should benefit from increase in clients and client worksite employees across the company’s PEO business. Acquisition of HR Outsourcing Holdings, Inc. (“HROI”) is likely to act as a major growth catalyst.

Interest on funds held by clients is likely to benefit from higher average interest rates earned.

Paychex, Inc. Revenue (TTM)

In first-quarter fiscal 2019, total revenues of $862.8 million grew 9% year over year.

Earnings Likely to Grow on Tax Reform

The U.S. Tax Cuts and Jobs Act (TCJA), which reduced corporate tax rates significantly, are likely to boost Paychex’s earnings in the to-be-reported quarter. Notably, the consensus estimate for earnings per share (EPS) is pegged at 63 cents, indicating year-over-year growth of 6.8%.

In first-quarter fiscal 2019, adjusted earnings per share of 67 cents increased 18% year over year.

Our Model Doesn’t Suggest a Beat

Please note that 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. Zacks Rank #4 (Sell) or 5 (Strong Sell) stocks are best avoided, especially if the companies are witnessing negative estimate revisions. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Paychex has a Zacks Rank #3 but an Earnings ESP of -1.71%.

Paychex, Inc. Price and EPS Surprise

Key Picks

Here are a few stocks from the Zacks 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 upcoming releases:

Accenture (NYSE:ACN) has an Earnings ESP of +0.89% and a Zacks Rank of 3. The company is slated to release first-quarter fiscal 2019 results on Dec 20. You can see the complete list of today’s Zacks #1 Rank stocks here.

Delphi Technologies (NYSE:DLPH) has an Earnings ESP of +0.27% and a Zacks Rank #3. The company is expected to report fourth-quarter 2018 results on Feb 20.

Aptiv (NYSE:APTV) has an Earnings ESP of +0.33% and a Zacks Rank #3. The company is expected to report fourth-quarter 2018 results on Feb 7.

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