Paychex Earnings Preview: Strong Job Environment, Health Insurance Demand To Drive Revenues

Paychex (NASDAQ:PAYX) is set to release its third quarter fiscal 2015 earnings on Wednesday, March 25, before the market opens. The stock has been on a bull run in the past few months, reaching new highs on the strength in the U.S. job environment. For the third quarter, we expect the robust U.S. job market conditions to translate into higher checks per client for Paychex. Purchases of solutions for compliance with the Patient Protection and Affordable Care Act (PPACA) should also help increase Paychex’s revenues.

In the second quarter, Paychex’s service revenue grew 10% year-on-year, to reach $666 million, driven by an increase in pricing and new service offerings. ^[1] The rising demand for healthcare reform products also contributed to the growth. Paychex’s net income grew 9%, driving a 9% increase in earnings per share, which reached $0.47. In its earnings release, Paychex reiterated its guidance of 8-10% growth in revenue for the fiscal year 2015.

See our complete analysis of Paychex here.

Strong Job Additions Could Drive Checks Per Client

According to the March release of the Employment Situation Summary by the U.S. Bureau of Labor Statistics, the unemployment rate in the U.S. dipped to 5.5% in February, the lowest since the 2008 recession. ^[2] Job additions for the month of February totaled 295,000, compared to market expectations of 240,000 job additions. February marked the twelfth straight month of 200,000 plus job additions, indicating persistent growth momentum in the U.S. job market.

Even Paychex’s target market, small businesses with less than 50 workers, showed a significant increase in jobs in the first two months of the year. After declining for a couple of quarters, the Paychex IHS Small Business Index, an indicator of change in small business employment in the U.S., increased 0.09% sequentially in January. ^[3] Small business job additions continued their momentum in February, growing 0.19% sequentially. We expect Paychex to report a sequential improvement in checks per client in the fiscal third quarter. However, year-on-year comparisons might not be as strong, since the Paychex IHS Small Business Index for February was down 0.31% over last year.

Health Insurance Demand Presents Growth Prospects

The Patient Protection and Affordable Care Act (PPACA) has encouraged 11.7 million enrollments to the Health Insurance Marketplace since November 15, 2014. ^[4] However, employers are still unprepared to comply with the PPACA, which includes a regulation requiring many employers to provide health insurance to employees. According to recent research by Automatic Data Processing (NASDAQ:ADP), half of the large employers (1,000+ employees) in the U.S. are unprepared to comply with the regulations of the PPACA. ^[5]

As businesses continue to buy health insurance for their employees to remain compliant with the PPACA, we believe that Paychex’s revenue from health insurance offerings will grow. A similar trend was noticed in the previous quarter, wherein Paychex’s Human Resource Services (HRS) revenue grew 21%, ^[1] as a result of growth in sales of a new health insurance offering, which represented around 7% of total HRS revenue. ^[6]

Revenue Could Grow On Pricing Increase

Paychex generally implements a pricing increase of 2-4% every year. At the beginning of this fiscal year, Paychex indicated that its pricing increase was in the middle of this range. ^[7] Paychex’s second quarter Payroll revenues benefited from this increase in pricing and grew 4%, to reach $411 million. ^[1] We expect the pricing increase to drive Payroll revenues in the third quarter as well.

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1. Paychex’s Q2 FY 2015 10-Q SEC Filing, December 19, 2014, www.sec.gov [↩] [↩] [↩]
2. Employment Situation Summary, www.bls.gov [↩]
3. The Paychex | IHS Small Business Jobs Index, www.paychex.com [↩]
4. By the Numbers: Open Enrollment for Health Insurance, www.hhs.gov [↩]
5. One in Two Large Employers Unprepared to Fully Comply with the Affordable Care Act, January 15, 2014, www.adp.com [↩]
6. Paychex’s (PAYX) CEO Martin Mucci on Q2 2015 Results – Earnings Call Transcript, December 19, 2014, www.seekingalpha.com [↩]
7. Paychex (PAYX) CEO Martin Mucci on Q1 2015 Results – Earnings Call Transcript, September 24, 2014, www.seekingalpha.com [↩]