2023-10-11 10:33:39 ET
Summary
- Paychex's latest quarterly results once again exceeded analysts' expectations for earnings and revenue.
- The company's share price might not be presenting the most opportune time to consider jumping in, but for a long-term investor, the prospects of future growth are compelling.
- Paychex has a clean balance sheet with no net debt and has been experiencing strong earnings growth, making it a potential buy for long-term investors.
Written by Nick Ackerman.
Paychex's ( PAYX ) latest quarterly results are out, and they seem to be kicking off their fiscal 2024 in style. Paychex provides payroll services as well as human resources and other benefits primarily to small and medium businesses. Though, they are capable of handling large companies as well with 1000+ employees.
Earnings came out and were above analysts' expectations, as well as revenue that was slightly above analysts' expectations. EPS estimate was $1.12, with a revenue estimate of $1.28 billion. This continues their trend of exceeding analysts' expectations for the last 16 out of 16 quarters - both in terms of EPS and revenue estimates.
PAYX Fiscal Q1 YoY Metrics (Paychex)
Perhaps more importantly, these latest figures showed strong growth heading into their latest fiscal year. Topping these expectations wasn't made easy by reduced expectations heading into the earnings either. Analysts have overall been essentially flat or slightly increasing expectations for the company.
PAYX Earnings Revisions (Seeking Alpha)
The "Management Solutions" segment of the business is the largest contributor to their revenue and increased by 6%. Although the smaller slice of "Professional Employer Organisation ("PEO")" is also contributing to growth with revenue increasing 5%.
One of the other 'segments' of the business that have been noteworthy is the cash balances being held. As interest rates have been increasing, this company has been reaping the benefits of seeing interest grow substantially. From the year-ago period, interest grew by 83%.
Interest on funds held for clients increased 83% to $32.7 million for the first quarter primarily due to higher average interest rates and average investment balances.
PAYX Interest Boost (Paychex (highlight from author))
The company runs a very clean balance sheet with minimal debt. In fact, they don't have any net debt at all. Cash and cash equivalents were sitting at $1.646 billion compared to the long-term notes of $800 million outstanding. These are both fixed-rate notes that pay effective interest rates of 4.14% and 4.31%. The Series A note matures in 2026, and the Series B will mature in 2029.
Earnings Growth Makes It A Potential Buy For Long-term Investors
Since their last quarterly report , the stock had been on fire. However, a lukewarm August put an end to that explosive run. September has nearly taken all of that initial climb back. However, during this short period, the overall equity space also struggled. PAYX is still slightly ahead of the S&P 500 Index. Additionally, I've included the performance comparison with the Invesco S&P 500 Equal Weight ETF ( RSP ), as I believe it is a better representation of the overall market these days.
Ycharts
During the significant run-up for PAYX, it was also a period where the more balanced RSP was participating, and that signifies broader participation was taking place. That would be as opposed to just the Magnificent Seven continuing to drag up the broader indexes with it.
Of course, a higher price or a lower share price on its own doesn't necessarily tell us if a company's stock is cheap or expensive. Perhaps in the shorter term, technical-oriented chartist investors can read into these sorts of moves, but fundamentally speaking, it doesn't tell us what sort of value a stock has. Instead, we can look toward historical valuations to help guide us if a stock is getting expensive or is still relatively inexpensive.
Today, shares are trading around $112, which puts the forward P/E at 25.33x. That is on the lower end of the fair value range. That could suggest that there is some upside potential here, but not an excessive amount and multiple expansions from here is likely to be limited.
PAYX Fair Value Range (Portfolio Insight)
However, while that might be the case, a long-term investor can look toward the future growth from this company in terms of growing earnings and revenue. At least that is what history has shown us with this latest quarter provided added to its track record.
The trend of earnings growth for PAYX has been there, and analysts expect it to continue into the coming years.
PAYX Historical and Projected Near-Term Earnings (Portfolio Insight)
Therefore, while buying a stock near its fair value range might seem like you aren't getting a great deal - a long-term investor could look at additional capital appreciation potential in the years to come, regardless of growth in the company.
The above graph shows the earnings expectations going forward for the following two years. Going further out means there are more variables to consider, and it's harder to gauge. That being said, some analysts attempt to do just that anyway. In this table, we can see how the forward P/E stats decline as earnings estimates grow over the next decade.
PAYX Long-term Earnings Expectations (Seeking Alpha)
Of course, this does mean that in the short term, the share price gives very little in terms of a margin of safety. Any economic disruption, such as a recession, would disrupt the outlook for the company. They were able to handle Covid without a dip in earnings at all, but that was a short-lived event. A prolonged downturn with unemployment elevated would be much more disruptive to the company's operations.
We should also note that since they generally beat guidance estimates, they could be looking at even better growth going forward - should that trend continue.
From the company's perspective , they are anticipating EPS growth for the next year to come in, similar to what is currently expected from analysts for the year. Revenue estimates from analysts are similarly coming in line with these expectations, as they are calling for a 6.36% growth for fiscal 2024. Maintaining the trend here suggests management could deliver on what analysts are expecting.
Spectacular Dividend Growth
Given the fast pace of earnings growth for the company, it's also translated into shareholder-friendly moves such as buybacks and dividend growth. However, buybacks aren't something that PAYX has historically been heavy in conducting. The shares outstanding in the last decade have come down some but, in more recent years, have been trending upward - meaning they are creating more shares than they are repurchasing.
Ycharts
In the dividend growth department, shareholders have been rewarded handsomely. While the whole sector has performed well, PAYX leads the way above its peers in that regard with faster growth than others. The last raise earlier this year was a 12.7% increase from the prior, meaning that the dividend growth had actually accelerated this year relative to its longer track record.
PAYX Dividend Growth Comparison (Seeking Alpha)
Given the growth trajectory, dividend growth could be anticipated to continue at a healthy clip. Additionally, the FCF/share payout ratio of ~77% and EPS payout ratio of ~78% may seem high. However, this is more or less right in line with what the company has historically paid for going back decades. If anything, it has even come down in recent years, which could have resulted in the larger-than-usual increase this year.
PAYX Dividends Paid and Coverage (Portfolio Insight)
Note: The chart in 2013 would appear as though they cut, but what ended up happening is that they paid out the first half of the dividend right at the end of 2012 .
Our common stock trades on the NASDAQ Global Select Market under the symbol “PAYX.” Dividends have historically been paid on our common stock in August, November, February, and May. In fiscal 2013, the dividends that would typically have been paid in February 2013 and May 2013 were accelerated and paid in December 2012.
Conclusion
PAYX has delivered another solid quarter and is continuing to experience growth. The strong labor market is certainly a contributing factor, and in the short term, a recession could likely disrupt an otherwise solid story behind this company. However, for long-term investors, there is still an opportunity here as the price isn't overvalued but mostly fairly valued. With future prospects looking optimistic, what is fairly valued today can end up being undervalued in the future based on growth prospects.
For further details see:
Paychex: Growth Prospects Remain Attractive