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Paychex to resume growth

I remain upbeat about the shares of Paychex, a leading US provider of payroll, human resources, insurance, and benefits outsourcing solutions for small- to medium-sized businesses. Recently, the company issued solid financials for its fiscal 2016 third quarter ended Feb 29. Revenues increased 7% y-o-y to $752.6 mn and surpassed consensus estimate of $750 mn. Payroll Service segment revenues went up 4% to USD 439.6 mn, primarily on the back of higher revenue per check and client base. Human Resource Services segment revenues jumped 12% to $301.1 mn mainly driven by solid growth in client base and worksite employees, increased revenues from retirement and online HR administration services. Operating income increased 6% to $280 mn, and operating margin came in at 37.2%. Earnings per share rose 9% to 50 cents and matched analysts’ average projection.

Paychex financial position as of Feb 30 remained strong, with cash and total corporate investments of $327.2 mn and no long-term debt. In the first three quarters of fiscal 2016, the company generated operating cash flow of $791.2 mn and spent $107.9 mn on share repurchases and paid $455 mn as dividend, which offers a healthy annualized dividend yield of 3.2%.

I believe that Paychex’s focus on new products launches and expansionary initiatives will continue to support the company’s long-term growth strategy. Earlier this fiscal year, the company released the Paychex Flex Time and Paychex Flex Benefits Administration modules for its cloud-based human capital management platform, which should further strengthen its robust, integrated suite of HCM solutions. Besides, in December, Paychex completed the acquisition of Advance Partners, a leading provider of integrated financial, operational, and strategic services to support independent staffing firms.

Currently, shares of Paychex are trading above $52 support level as well as 50-day moving average. The stock, in my opinion, is well positioned to resume growth, with medium-term target at $58.