Paychex gains from strong HR activity; lifts FY18 outlook after Q3 revenue beat

Paychex (PAYX), a provider of payroll and HR services, reported yet another quarter of strong revenue and income growth that surpassed analysts’ predictions. The market responded positively to the upbeat outlook and the stock gained sharply, indicating a rebound from its six-month lows.

Revenues advanced 9% annually to $867 million, supported by a double-digit growth in HR solutions revenues and notable contributions from the recently acquired HR Outsourcing Holdings. Revenues from the company’s core operation, payroll services, moved up 2%.

The impressive top-line performance translated into a 29% growth in earnings to $0.72 per share.  Excluding the impact of termination of license agreements and tax-related benefits, earnings moved up 15% to $0.63 per share, in line with Street expectations.

“We continued to experience solid growth in the third quarter across all major human capital management product lines. In particular, comprehensive human resource outsourcing solutions, retirement services, insurance services, and our time and attendance solutions have performed well,” said Paychex CEO Martin Mucci.

Looking ahead, the management expects the tax reform implemented last year and the integration of Lessor Group would further augment the top-line performance. Accordingly, the company upgraded the forecast for its full-year adjusted EPS growth to 15-16% from 7-8% it had projected earlier. The revenue growth outlook has been raised to 7% from the previous estimate of 6%.

During the quarter, Paychex continued its global expansion and closed the acquisition of Denmark-based payroll and HCM solutions provider Lessor Group.

The impressive top-line performance translated into a 29% growth in earnings to $0.72 per share

Over the recent months, the HR and payroll services sector has been in the spotlight, both in the operational and investment perspectives, in line with the upbeat labor market and wage data.

Automatic Data Processing (ADP), the main competitor of Paychex, is scheduled to release its third quarter financial results on May 2.  Paychex’s stock rose nearly 3% soon after markets opened on Monday, marking the strongest ever gain during the long-drawn downtrend that began a year ago.