Paychex Continues To Provide Steady And Predictable Results

Paychex Continues To Provide Steady And Predictable Results
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Paychex (NASDAQ:PAYX) is an American provider of human resources, payroll, and outsourcing services for small and medium-sized businesses. The company is based out of Rochester, New York, and has payroll clients across North America and Europe.

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Highlights:

  • Services revenue increased by 11% for the year to $1129 billion.
  • Net income grew by 11% to $394 million. Earnings per share came in at 89 cents per share.
  • Total payroll clients ended up at 730,000 at the end of the year. The company also services 2 million work-site employees.
  • Pooled employer plan now serves 104,000 businesses and 1.3 million client employees.
  • Remote and hybrid workforce continue to benefit from the new technologies that are being introduced by Paychex.
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Paychex’s Management Solutions revenue increased by 12% to $845 million for the fourth quarter and increased by 14% to $3.4 billion for FY-2022. The revenue growth resulted from payroll for clients and product penetration across the HCM offering. Furthermore, Paychex continued with a high level of client retention. Higher price realization and client engagement led to higher revenues, as well.

Meanwhile, Professional Employer Organizations (PEO) and Insurance Solutions’ revenue increased by 10% to $284 million for the fourth quarter and 14% for the year. An increase in the number of worksite employees and wages primarily led to higher wages. Higher revenue from state health insurance and higher state unemployment insurance also helped drive revenue during the quarter.

Operating expenses increased by 11% to $750 million for the quarter and 7% for the fiscal year. The costs resulted from increased headcount support, higher wages, performance-based compensation, and fringe benefits. In addition, costs stemming from product development, marketing, and technology, also resulted in higher costs.

Paychex Outlook For The Year:

Paychex continues to perform well in a relatively competitive industry. Management has guided that the company should continue to benefit from the tight labor market. And with positive macroeconomic trends surrounding employment, the company should also continue to do well during the next fiscal year as well. But, the potential for recession constantly hangs in the background, and management continues to monitor leading indicators to ensure that operations remain steady, in case such a scenario occurs.

Labor markets are expected to remain robust for the remaining few quarters unless a major reversal in the economy occurs. Currently, key indicators such as consumption, investment, and PMI, do not point to a deep recession.  Additionally, the inflationary environment should help improve revenue for the company. The PEO and Insurance Solutions division continued to see gradual growth as well and is much less likely to be affected during a recessionary downturn.  Enhanced insurance offerings and more customized solutions are increasingly helping to drive revenue. Revenue is expected to grow in the high single-digits for the year, as the base effect from previous years wears off. Plus, with the tight labor markets, the company does not expect a significant increase in revenue flow. The primary revenue driver in FY-2023 will be the continued introduction of additional products and services.

Valuation And Investing In Paychex:

Paychex currently provides a dividend yield of 2.75% and is trading at a valuation of 30x price-to-earnings, and forward P/E is expected to be around 27x. Considering the growth rate and increasing discount rates, the stock trades slightly higher than it should. Cash flow from operations remained healthy at $1.3 billion and should increase slightly in the coming year. Cash and restricted cash and total corporate investments amounted to $1.3 and should continue to grow as time progresses.

Paychex’s main worry would be a significant event that severely affects payroll and employee-related services such as health and employment insurance. Although unlikely, investors need to weigh the likelihood of such an event occurring.  Other risks, including changing trends in the worker compensation and insurance rates or underlying claims increasingly suddenly.  Overall, Paychex remains a company that will continue to provide predictable results, and that might suit some investors.

Article by Parth Pala, MarketBeat

Updated on Jun 30, 2022, 4:46 pm

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