Earlier this morning, Paychex (PAYX), a provider of various human resource services, issued solid fiscal Q1 results while also reaffirming its FY18 EPS guidance. The results have the stock currently indicated to open with about a 3% gain, knocking on the door of all-time highs. So far in 2017, the stock has been very quiet, essentially flat on the year. However, if using a longer term chart, a different picture emerges as PAYX has been in a healthy uptrend since early 2012.
What generally has been driving this performance is the company's very consistent quarterly results versus analysts' expectations, together with stable earnings and cash flow growth. The last time PAYX missed on the bottom line was all the way back in 4Q13. Since then, small but steady bottom line beats, coupled with predictable mid-to-high single digit topline growth, has been its M.O.
Before diving into this quarter's results, we wanted to provide a little more background on what the company does. As noted above, PAYX is involved with providing human resources services. More specifically, it offers payroll, retirement, and insurance services, mainly to small and medium sized businesses in the U.S. and Germany. The list of individual solutions it offers is large, but, here are a few examples:
- In payroll, it offers Paychex Flex, which resides in the cloud, allowing for online access to payroll anywhere at anytime.
- Also in payroll, it provides payroll tax administration, taking care of federal, state, and local payroll taxes
- For HR, it helps with COBRA administration, employee screening, background checks, and state unemployment insurance.
- Additionally, business can use PAYX for credit and debit card processing, ACH payment and eCheck processing, as well as expense management.
Circling back to its 1Q18 results, EPS came in at $0.62, beating the Capital IQ consensus by $0.02, with revenue up 4% year/year to $816.8 million, essentially inline with expectations. As discussed above, small top and bottom line beats have become par for the course for PAYX. However, the 4% revenue growth is a bit lighter than its typical 6-10% performance. In fact, it is its slowest growth rate in at least five years -- albeit, by fractions of a percent.
PAYX isn't really a topline growth story anyways. What attracts investors to the stock is its steady performance, profitability, cash flow, and income generation. In those areas, PAYX's performance looks better. For instance, operating income was up 7% year/year to $345 million, Adjusted EPS climbed by 11%, and cash flow from operations increased by 17% to $343.6 million. The solid cash flow will help support its current dividend of $2/share annually, equating to a yield of 3.4%.
Overall, while its growth isn't stellar, PAYX continues to be a model of consistency and a reliable income generator. A move to all-time highs could also put the name on more people's radars, creating a potential upside catalyst.