Paychex Inc. PAYX is well set on the growth trajectory, gathering momentum from its positive earnings surprise history and strong fundamentals. Also, shares of Paychex have been trending upward, yielding a positive one-year and year-to-date return.
An impressive track record of better-than-expected quarterly earnings, solid cash flows and its policy of regularly returning cash to shareholders are driving Paychex’s positive share movement.
Paychex’s second quarter fiscal 2016 earnings of 52 cents per share surpassed the Zacks Consensus Estimate by a penny and jumped 10.6% from the year-ago quarter mainly backed by higher revenues
Paychex reported total revenue (including Interest on funds held for clients) of $722.million, up 7% year over year. Excluding interest on funds held for clients, total services revenue (Payroll service and Human Resource Services) grew 7% year over year to $711.3 million.
Paychex exited the second quarter with cash, cash equivalents and corporate investments of $476.4 million compared with $537.7 million at the end of the previous quarter. The company has no long-term debt. The company generated operating cash flow of $419.9 million in the first half of fiscal 2016. This enables the company to pursue strategic acquisitions and invest in growth initiatives.
During the first six months of fiscal 2016, Paychex repurchased approximately $62.9 million of common stock and paid $303.6 million as dividend. Share repurchases are a good way of returning cash to investors while boosting the company’s earnings.
It is worth mentioning that Paychex recently completed the acquisition of Advanced Partners within a month of entering into the deal. According to Paychex, Advance Partners “offers customizable solutions to the temporary staffing industry, including payroll funding and outsourcing services, which include payroll, invoicing, and tax preparation.” Therefore, the acquisition will enable Paychex to capitalize on the rising opportunities in the temporary staffing industry.
Going forward, we are encouraged by Paychex’s investments in product development and focus on building its sales force to support revenue growth. We also believe that the company’s expansionary initiatives, such as joint ventures and acquisitions, support its long-term growth strategy.
Product launches are expected to be the added growth drivers. Moreover, Paychex’s focus on small and mid-sized businesses looking for HR solutions could provide growth opportunities.
However, unfavorable interest rates and competition from Automatic Data Processing ADP and Insperity NSP remain headwinds.
Paychex has a Zacks Rank #2 (Buy). A better-ranked stock is VASCO Data Security International Inc. VDSI, sporting a Zacks Rank #1 (Strong Buy).
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