A month has gone by since the last earnings report for Paychex (PAYX). Shares have lost about 2.5% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Paychex due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Paychex Q4 Earnings Meet Estimates, Revenues Beat
Paychex’s fourth-quarter fiscal 2020 adjusted earnings of 61 cents per share came in line with the Zacks Consensus Estimate but decreased 3.2% on a year-over-year basis. Total revenues of $915.1 billion beat the consensus mark by 0.4% but decreased 7% year over year.
Quarterly results were weighed down by coronavirus-led lockdowns, which prompted businesses to suspend operations.
Revenues in Detail
Revenues from Management Solutions decreased 6% year over year to $661.8 million. The downfall was due to a decline in check volumes, partially offset by increased penetration of retirement services and time and attendance services. The decrease in check volumes was owing to a reduction in the number of clients processing payrolls and the number of employees paid due to the shutdown.
Professional employer organization (“PEO”) and insurance services revenues were $228 million, down 11% from the year-ago quarter. The downfall was due to a decline in the number of worksite employees serviced by existing clients. Insurance Solutions revenues were impacted by a decline in the number of health and benefit applicants and loss in workers’ compensation premiums.
Interest on funds held for clients increased 14% year over year to $25.3 million on higher realized gains, which were partially offset by lower average investment balances and average interest rates. The realized gains came from the strategic repositioning of client fund portfolio to enhance liquidity in response to coronavirus-related uncertainties. Funds held for clients’ average investment balances were impacted by lower client fund collections due to coronavirus and changes in client-base mix, partially offset by wage inflation and timing of collections and remittances.
Operating income decreased 5% year over year to $299.6 million. Operating margin rose to 32.7% from 32.1% in the year-ago quarter.
EBITDA of $351 million decreased 5% year over year. EBITDA margin came in at 38.4% compared with 37.9% in the year-ago quarter.
Balance Sheet & Cash Flow
Paychex exited fourth-quarter fiscal 2020 with cash and cash equivalents of $905.2 million compared with $780 million at the end of the prior quarter. Long-term debt was $796.8 million compared with $796.7 million in the prior quarter. Cash provided by operating activities was $388.2 million in the reported quarter.
During the reported quarter, the company paid out $222.6 million in dividends.
Fiscal 2021 View
For fiscal 2021, total revenues are expected to decline 2-5%. Adjusted earnings per share are anticipated to fall 6-10%. Adjusted operating margin is expected in the band of 34-35%. Adjusted EBITDA margin is expected to be between 39 and 40%. Effective income tax rate is projected in the range of 24.5-25%.
Paychex expects PEO and insurance services revenues to decline 2-7%. Management solutions revenues are anticipated to decline 1-4%. Interest on funds held for clients is expected to be between $55 and $65 million.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -7.12% due to these changes.
Currently, Paychex has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% 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.
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.
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