William Blair Reaffirms Outperform On Paychex Following Q1 Earnings Report

In a research note published today, William Blair analyst Timothy McHugh reaffirmed an Outperform rating on Paychex (NASDAQ:PAYX), following the release of their first-quarter results. No price target was assigned.

McHugh wrote, “There was nothing that was overly surprising on the conference call and there was no change to guidance (which calls for underlying revenue growth of 6%-8%, up from 5%- 6% growth during the prior two years), but management struck a fairly positive tone. Management is pleased with the impact of the recent increases to the salesforce (which it said it partly accelerated the growth of because of opportunities it sees in the core payroll business), the company’s price increase sounds slightly better than the last few years, HR outsourcing solutions (PEO, ASO) continue to grow quickly, and the company is seeing solid progress for some of its add-on SaaS solutions (i.e., time and attendance solutions). Contrary to concerns about competition from SaaS competitors, management also made the comment that it is “more confident” lately about Paychex’s competitive positioning in the market, given competitive wins in the quarter and the evolution of its product portfolio. None of those factors will drastically alter the company’s growth rate, and we are cognizant that part of the reason the company beat first-quarter estimates is that the company talked down expectations for the first quarter on its last conference call due to the timing of expenses. These trends bolster our confidence in the company’s ability to meet or exceed estimates this year and to deliver high-single-digit or better earnings growth during the next few years. Therefore, we are increasing our EPS estimates by $0.01 each, to $1.85 in fiscal 2015 (8% growth) and $1.99 in fiscal 2016 (8% growth).”

McHugh added, “Shares of Paychex (which were up about 3%-4% on Wednesday) trade at a forward P/E multiple of 23 times, which compares with about 24 times for ADP. While we do not expect much upward movement in the company’s valuation multiple from current levels, we believe Paychex can continue to deliver a solid total return, driven by high-single-digit EPS growth, a dividend yield of 3.6%, and the potential for accelerated growth when interest rates (particularly short-term rates) start to climb or the company more aggressively uses its very strong, debt free balance sheet. Our rating thus remains Outperform.”

According to TipRanks.com, which measures analysts’ and bloggers’ success rate based on how their calls perform, analyst Timothy Mchugh has a total average return of 23.3% and an 80% success rate. Mchugh has a 16.1% average return when recommending PAYX, and is ranked #654 out of 3319 analysts.

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