Paychex, Inc.: Tech Stock Immune to Trade War With China, More Double-Digit Gains Coming

Paychex, Inc. Posts One of the Sector’s Best Quarters

Paychex, Inc. (NASDAQ:PAYX) is a great tech company that continues to perform well and reward buy-and-hold investors. That said, Paychex stock wasn’t immune to the fourth-quarter sell-off.

On the other hand, PAYX stock has performed better than most big tech stocks in 2019, up 32% year-to-date.

The payroll company reported third-quarter results that topped estimates, but it issued an outlook below what Wall Street was expecting.

Still, the stock’s long-term outlook remains bullish. The company recently completed its acquisition of Oasis Outsourcing Acquisition Corporation, the country’s largest privately owned professional employer organization, positioning the company for additional growth.

An added plus, Paychex is immune to any trade war the U.S. has with China. The company’s customers are found throughout the U.S. and across Europe.

Paychex, Inc. Overview

The company’s name pretty much gives it away. Paychex is a leading payroll, human resource (HR), and benefits outsourcing company.

Over the last 48 years, Paychex has grown from one employee to more than 14,000 employees serving 650,000 small and medium businesses in more than 100 locations in the U.S. (where it pays one of out every 12 American private-sector employees) and Europe. (Source: “Corporate,” Paychex, Inc., last accessed May 10, 2019.)

The Rochester, New York-based company’s payroll and HR products include payroll processing, retirement services, insurance, and an outsourced HR solution.

Paychex, Inc. Stock

(Source: “Paychex, Inc. (PAYX),” Yahoo! Finance, last accessed May 10, 2019.)

Paychex stock has been bullish since the start of 2019, buoyed by the supercharged January effect, solid third-quarter results, and investor optimism.

Since the start of 2019, Paychex’s share price has advanced 32%. Over the same time frame, the Nasdaq has increased 21%. Over the last 52 weeks, the PAYX stock price has grown more than 35%. Meanwhile, the Nasdaq is up 7.6% and the S&P 500 is up 6.73%.

Investors appear to have a lot of faith in Paychex going forward; just 2.6% of outstanding shares are being shorted.

Chart courtesy of StockCharts.com

In early May, Paychex announced that its quarterly dividend increased by $0.06, or 11%, from $0.56–$0.62 per share. The dividend is payable May 30, 2019 to shareholders of record as of May 15, 2019.

Paychex President and CEO Martin Mucci said:

This dividend increase demonstrates our strong commitment to providing ongoing, outstanding shareholder value. Through the combination of our financial strength and investment in strategic growth opportunities, we are able to expand the returns we deliver to our shareholders.

(Source: “Paychex Increases Quarterly Dividend by Nearly 11%,” BusinessWire, May 3, 2019.)

Paychex Completes Acquisition of Oasis Outsourcing

On December 21, 2018, Paychex announced that it completed the $1.2-billion acquisition of Oasis Outsourcing Acquisition Corporation, an industry leader in providing HR outsourcing services. (Source: “Paychex Completes Acquisition of Oasis Outsourcing,” Paychex, Inc., December 21, 2018.)

The acquisition significantly advances Paychex’s leadership position in HR outsourcing, providing new clients access to Paychex’s products and services, and creating one of the nation’s leading professional employer organization.

With the acquisition, Paychex now serves more than 1.4 million worksite employees through its HR outsourcing services.

Headquartered in West Palm Beach, Florida, Oasis serves more than 8,400 clients in all 50 U.S. states.

Q3 Results Beat Expectations

On March 27, Paychex announced its financial results for the third quarter ended December 31, 2018.

Third-quarter revenue increased 14% year-over-year to $1.1 billion. Interest on funds held for clients was $23.0 million, an increase of 27%. (Source: “Paychex, Inc. Reports Third Quarter Results,” Paychex, Inc., March 27, 2019.)

Analysts expected the company to report third-quarter revenue of only $1.0 billion and earnings of $0.88.

In the third quarter, the company’s “Management Solutions” revenue was $801.6 million, a four-percent increase from the same prior-year period. That was below the consensus expectation of $803.9 million.

Net income slipped 12% to $324.6 million and diluted earnings per share fell to $0.90 per share, an 11% drop. Adjusted net income and adjusted diluted earnings per share each increased three percent to $322.4 million and $0.89 per share.

Mucci commented:

We experienced solid growth in the third quarter across our major human capital management product lines. Results were paced by our human resource outsourcing services and time and attendance solutions, and our health and benefit insurance and retirement services. We also introduced some significant new product and mobility app enhancements for our clients.

(Source: Ibid.)

Year-to-date revenue was up 10% at $2.8 billion, net income for the period was up four percent at $804.0 million, and diluted earnings per share were up three percent at $2.22.

Adjusted net income advanced 12% to $799.7 million while adjusted earnings per share increased 12% to $2.21 per share.

The company’s financial position as of February 28, 2019 remained strong with cash, restricted cash, and total corporate investments of $886.4 million.

During the nine months, Paychex repurchased 500,000 shares of common stock, for a total of $32.8 million. In the respective prior-year period, the company repurchased 1.6 million shares, for a total of $94.1 million.

Paychex, Inc.’s outlook for fiscal 2019, ending May 31, 2019 remains unchanged:

• Total revenue, including interest on funds held for clients, is expected to increase in the range of six percent to seven percent.
• Net income and diluted earnings per share are expected to increase approximately four percent.
• Adjusted net income and adjusted diluted earnings per share are expected to increase in the range of 11% to 12%.

Analyst Take

Paychex, Inc. is a great tech stock for those with a long-term investing horizon. It has a strong footprint in the U.S. and Europe, a strong balance sheet, and consistently reports solid financial results. The company recently completed its acquisition of Oasis, bringing together two of the industry’s most experienced brands.

Paychex stock is not a flashy. Instead, it’s an excellent tech stock with a long history of rewarding investors with market-beating returns. It also won’t be negatively affected by a trade war with China or ripples from any ongoing uncertainty.