Paychex Rides on Tax Cut, Acquisitions, Strong Cash Position

Paychex, Inc.PAYX looks strong on the back of its strong balance sheet and strategic acquisitions. The company's bottom line continues to benefit from the tax reform.

The company reported strong second-quarter fiscal 2019 results wherein both earnings and revenues surpassed the Zacks Consensus Estimate. Adjusted earnings of 65 cents per share outpaced the consensus estimate by 2 cents and increased 20.4% year over year. Total revenues of $858.9 million beat the consensus mark by $2.7 million and increased 7% year over year.

Paychex has an impressive earnings surprise history, having outpaced estimates in three of the last four quarters. It delivered average four-quarter positive earnings surprise of 1.9%. The Zacks Consensus Estimate for third-quarter fiscal 2019 earnings have remained unchanged over the past 60 days.

What's Driving Paychex?

Solid Cash Position

Paychex is a cash rich company with a strong balance sheet. At the end of second-quarter fiscal 2019, Paychex had cash and cash equivalents of $510.6 million compared with $440.1 million at the end of the prior quarter. The company had no long-term debt to clear off. The significant amount of cash provides Paychex the flexibility to pursue any growth strategy in the form of strategic acquisitions and other related investments.

Acquisitions: A Key Growth Catalyst

Paychex has been active on the acquisition front. On Dec 21, Paychex completed the purchase of Florida-based Oasis Outsourcing for $1.2 billion in cash. The acquisition is expected to bolster the company's PEO growth strategy and expand its PEO sales organization, boost its client base, expand its HR outsourcing and technology-enabled services and help it enter new markets. Additionally, Paychex is optimistic of witnessing an addition of $155-$175 million revenues in the remaining part of fiscal 2019 (ending May 31, 2019) from this purchase.

During fiscal 2018, Paychex completed the acquisitions of Lessor Group ("Lessor") and HR Outsourcing Holdings, Inc. ("HROI"). Collectively, both these acquisitions contributed nearly 2% to total revenue growth in the first six months of fiscal 2019.

Prior to this, the company had completed 13 acquisitions that helped it to expand services as well as global reach, thereby boosting its revenues.

Lower Tax Rate Driving Bottom Line

Lower tax rate as a result of the tax reform policy (Tax Cuts and Jobs Act) is contributing to Paychex's bottom line. The company's second-quarter fiscal 2019 adjusted earnings of 65 cents per share increased 20.4% year over year. The company enjoyed a lower effective income tax rate of 23.8% for the reported quarter compared with 34.8% in the prior-year quarter.

For fiscal 2019, management is optimistic about the company's bottom line and its tax rate. Adjusted earnings per share are estimated to grow at a rate of 11-12% and effective income tax rate is projected to be approximately 24%.

Shareholder-Friendly Moves

Reduced taxes will likely lead to greater retention of profits, thus helping the company to allocate more funds toward growth initiatives as well as reward shareholders through share buyback or increased dividend payments. In the first six months of fiscal 2019, the company repurchased 0.5 million shares for $32.8 million and paid $402.7 million in dividends.

During fiscal 2018, Paychex repurchased shares worth $143.1 million and paid dividend of $739.7 million. During fiscal 2017, Paychex repurchased shares worth $166.2 million and paid dividend of $662.3 million. Such moves indicate the company's commitment to create value for shareholders and underline its confidence in its business.

Zacks Rank & Stocks to Consider

Paychex currently carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Some other top-ranked stocks in the broader Zacks Business Services sector are Interpublic IPG , Automatic Data Processing ADP and Navigant Consulting NCI , each carrying a Zacks Rank #2. Long-term expected EPS (three to five years) growth rate for Interpublic, Automatic Data Processing and Navigant is 7.4%, 12.5% and 13.5%, respectively.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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