Opinions
David Driscoll
Paychex
PAYX-Q
PAST TOP PICK
Jan 11, 2018
Stock price when the opinion was issued
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Recent earnings were up 4%. Veritable cash cow because they bank all the payroll taxes (that customers submit to the IRS) at current interest rates. It's like free money on top of earnings. Revenue growth was double GDP. Entirely domestic, so protected from trade barriers.
Services small companies, so if the economy does well from tax cuts, this name should continue to grow. Long-term, compounding annual returns of 14-15% -- you double your money roughly every 4-5 years. A buy and hold, not a trade.
Is a domestic US company, so it faces no tariff risk. Is Trump cuts taxes 15%, this adds 20% to growing earnings for PAYX. Margins have been growing, and they just bought a company that will accrete to earnings (they report tomorrow). Trades at a high 28x PE, but the dividend grows 10% annually. Has owned this 30 years.
They reported a mixed quarter: in-line earnings and slightly lower revenue, but the full-year revenue forecast was light, though earnings forecast was fantastic. Made new sense that shares slid 9% today. He likes their merger with Paycore which may have made their quarter harder to understand.
(A Top Pick March 13/17. Up 10%.) Basically does HR and payroll services. Every 2 weeks, when all these little companies have to remit their IRS payroll taxes, this company gets to grab $4 billion and park it over the weekend at rising interest rates. For every .25% interest rates rise in the US, this company makes free money of $3 million. They are catering to small-medium-sized businesses of 15 employees or less, so their business is picking up, revenues are growing and with tax cuts from 35% to 21%, it is going to release a lot of cash flow with an increasing dividend that could be as high as 50%.