Weakness In Paychex Shares Has Created Buying Opportunity

Paychex, Inc. PAYX reported 5 percent EPS growth for FQ2, in-line with the Street but below management’s full-year target.

Paychex is a “well-managed company” and should continue to “benefit from core trends such as outsourcing,” Argus’s John Eade said in a report. He reiterated a Buy rating on the company, with a price target of $70, citing the recent underperformance of shares.

The company’s shares rose 2.5 percent over the past quarter, versus a 4.3 percent gain in the S&P 500 over the same period. Over the past year, the Paychex stock has outperformed, gaining 14 percent versus a 9.5 percent advance for the S&P 500. The “recent relative weakness” offers a buying opportunity, Eade mentioned.

FQ2 Results

Paychex reported its quarterly revenue at $760 million, representing 7 percent year-over-year growth, driven by strength in Human Resource Service revenues. Operating earnings came in at $311 million, up 6 percent. Diluted EPS rose 8 percent to $0.56.

Management reiterated its guidance for FY 2017, projecting 7-8 percent growth in total service revenue, operating margin of 38 percent and adjusted net income growth of 8 percent.

Room For Growth

Paychex has consistently generated healthy free cash flows and high RoIC [returns on invested capital], and maintained a strong balance sheet, Eade noted.

“We also believe that Paychex has room to grow its core business: serving small companies with fewer than 50 employees. This segment remains underpenetrated and the economics of outsourcing payroll and HR services remain favorable. We also expect the company to benefit over time from rising short-term interest rates, which should increase earnings on funds held for clients,” the analyst wrote.