Before the markets opened on April 6, Paychex Inc. (PAYX, Financial), a human resources solutions and payroll services company for small- and medium-sized businesses, reported earnings results for its third quarter of fiscal 2021.
Although the company beat analyst consensus estimates on the earnings and revenue front, both metrics were also down year over year, causing the stock to plunge 5% to around $95.34 in midday trading.
Earnings results
For the third quarter of fiscal 2021, which ended on Feb. 28, the company reported revenue of $1.11 billion, which was down 2.7% year over year. Meanwhile, adjusted earnings per share came in at 96 cents, down 1% compared to the prior-year quarter. Analysts had been expecting revenue of $1.11 billion and adjusted earnings of 92 cents per share.
Operating income of $468.6 remained nearly the same compared to a year ago, but the operating margin increased to 42.2% from 41.1%.
By segment, Management Solutions revenue was comparable to the prior-year quarter at $846.8 million as increases in the client base and income from new services were mitigated by lower paycheck volumes as many companies were still operating with fewer employees. PEO and Insurance Solutions revenue was down 8% to $249.8 million, driven by fewer employees, lower wages and reduced state unemployment insurance.
Interest on funds held for clients decreased 29% to $15.1 million due primarily to lower average interest rates, though the average investment balances remained consistent.
The company continues to retain a strong cash balance with cash, restricted cash and total corporate investments standing at $1.1 billion as of the quarter's end compared to total short-term and long-term borrowings (net of debt issuance costs) of $804.2 million.
Martin Mucci, President and CEO of the company, commented, "Client retention remains strong and at record levels, and our results for the third quarter show that our resilient business model has helped us navigate the uncertainties created by Covid-19."
Looking forward
Paychex revised its previously issued guidance for fiscal 2021, with most of the estimates increasing marginally. This reflects a slightly more optimistic outlook.
Revenue for the Management Solutions segment is now expected to grow between 0% and 2%, while PEO and Insurance Solutions revenue is expected to decline anywhere from 2% to 5%. Total revenue and adjusted earnings per share are both expected to be anywhere from flat to down 2%.
Valuation
Even after the price drop following the earnings report, Paychex still trades at a high valuation, with the price-earnings ratio of 32.56 surpassing both the industry median of 23.52 and its own 10-year historical median of 25.19.
The GuruFocus Value chart also rates the stock as modestly overvalued. Even when taking into consideration the stock's historical returns and analyst estimates of business performance for the next couple of years, the price is still high.
As with many companies at the moment that are still reeling from the pandemic, the thing keeping stock prices at overvalued levels is not the company itself, but the U.S. Federal Reserve's record efforts to keep stock prices and borrowing capabilities high. It seems likely that as long as the Fed remains dovish and inflation does not spiral out of control, Paychex's high financial strength and the recovery of small- and medium-sized businesses could likely send its price even higher in the coming year.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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