Will Paychex Underperform The S&P Post The COVID-19 Crisis?

Comparing the trend in Paychex’s (NASDAQ: PAYX) stock over recent months with its trajectory during and after the Great Recession of 2008, we believe that the stock could potentially recover to a little below pre-crisis levels, once fears surrounding the coronavirus outbreak subside. Our conclusion is based on our detailed comparison of PAYX’s performance vs the S&P 500 in our interactive dashboard analysis, 2008 vs. 2020 Crisis Comparison: How Did Paychex Stock Fare During Coronavirus Crisis Compared to S&P 500?

The World Health organization (WHO) declared a global health emergency at the end of January in light of the coronavirus spread. Between January 31st and March 26th, PAYX stock has lost ~23% of its value (vs. about 21% decline in the S&P 500). A bulk of the decline came after March 6th, when an increasing number of Coronavirus cases outside China fueled concerns of a global economic slowdown. Matters were only made worse by fears of a price war in the oil industry triggered by an increase in oil production by Saudi Arabia.

Paychex’s Stock Has Fallen Considerably Because The Situation On The Ground Has Changed

• Payroll processing companies’ stocks generally move in tandem with the broader market trend and economic growth trends, as a slowdown in overall economic growth is likely to soften demand for external HR and payroll processors.
• A fall in demand is likely to put immense pressure on the company’s revenues in 2020, leading to a sharp drop in the company’s stock price.
• We believe PAYX’s Q3 and Q4’20 results will confirm this reality with a drop in revenues. (PAYX’s fiscal year ends in June)
• If signs of coronavirus containment aren’t clear by the Q3 earnings timeframe, it’s likely PAYX’s stock, along with the broader market, is going to see continued drop when results confirm palpable reality.

But Paychex’s Stock fared worse during the 2008 downturn. We see PAYX stock declined from levels of around $26 in October 2007 (the pre-crisis peak) to roughly $15 in March 2009 (as the markets bottomed out) – implying that the stock lost as much as 44% of its value from its approximate pre-crisis peak. This marked a lower drop than the broader S&P, which fell by about 51%.
However, PAYX recovered slowly post the 2008 crisis to about $21 in early 2010 – rising by 44% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period.

Will Paychex’s Stock Recover Similarly From The Current Crisis?

• Keeping in mind the fact that PAYX stock has fallen by ~23% this time around compared to the 44% decline during the 2008 recession, we believe it could potentially recover to a little below pre-crisis levels (around $79), once economic conditions begin to show signs of improving.
• That said, the actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.
• Further, our dashboard -28% Coronavirus crash vs 4 Historic crashes builds a complete macro picture and complements our analyses of the coronavirus outbreak’s impact on Paychex’s stock. The complete set of coronavirus impact and timing analyses is available here.

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