Paychex Inc. (PAYX, Financial) is slated to reveal its third quarter earnings for fiscal 2015 on March 25. With the stock being on a bull run in the recent months and touching new highs due to an upbeat job environment in the US, the market is optimistic about the company’s Q3 performance. Paychex competes with businesses such as Automatic Data Processing Inc. (ADP, Financial), Insperity Inc. (NSP, Financial) and TriNet Group Inc. (TNET, Financial) in the Staffing & Outsourcing Services marketplace. Shares of Paychex are up 7.8% since its last earnings report.
Paychex reported a 10% year-over-year growth in revenue from $606.4 million in Q2 2014 to $666 million for the second quarter of fiscal 2015 due to new service offerings, an increasing demand for products related to healthcare reform and an increase in pricing. While the company’s net income grew 9% year-over-year to $173.0 million, EPS followed suit with a 9% growth to 47 cents a share. Following the robust results, Paychex reiterated its earlier guidance of 8%-10% revenue growth and 6%-8% growth in net income for the full fiscal 2015 and followed it up with a regular quarterly dividend of $0.38 per share.
Job Additions to be Key Driver of Revenues
Paychex is likely to reap the benefits of an upbeat jobs market in the US. The jobs report for the month of March indicated a steady rise in employment, with a total of 295,000 jobs being added in February 2015 compared to the market expectation of 240,000 jobs. February not only marked the 12th consecutive month of 200,000 plus job additions, but also saw unemployment rate dipping to 5.5% in the US. Even the smallest of businesses in Paychex’s target market showed considerable jobs growth in the first two months of 2015. With the Paychex IHS Small Business Index increasing 0.09% sequentially in January 2015, experts foresee Paychex reporting a sequential growth in checks per client for the third quarter.
Increase in Pricing, Health Insurance Billings to Support Growth
In the second quarter, Paychex saw its revenue from Human Resource Services grow 21% on the back of sales of its new health insurance offering that accounted for nearly 7% of the overall revenues. As businesses continue to purchase health insurance for their staff to comply with the Patient Protection and Affordable Care Act, Paychex’s third quarter results are expected to benefit from growing revenues from its health insurance stable. At the same time, Paychex also declared its standard 2%-4% annual increase in pricing that contributed to a 4% growth in revenues during the second quarter to $411 million. The pricing increase is likely to continue driving revenues in the third quarter as well.
Final Thoughts
With the US jobs scenario looking up, Paychex is well positioned to benefit from the fallouts. Experts foresee the company beating the consensus estimate of 4.5% growth in earnings to 47 cents a share, with Paychex’s focus on developing its sales force and investments in product development supporting revenue growth of around 10.2% year-over-year. Paychex shares have mostly traded in the $45-$51 range in the last three months, hitting a 52-week high of $51.72 on March 23. The Paychex stock carries a price estimate of $51.41 a share, which is a shade lower than its current price. Although the market is currently bullish about Paychex shares, experts recommend playing the wait and watch game and offer a ‘buy’ guidance.
