Paychex Stock Peaked At $80?

Paychex stock (NASDAQ: PAYX) is down around 5% since the beginning of this year, but at the current price around $80 per share, we believe that Paychex stock could see further downside.

Why is that? Our belief stems from the fact that Paychex stock has risen 26% from the low seen in mid-2018. Our dashboard What Factors Drove 25% Change In Paychex Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.

Paychex is an HR and payroll processing company, that caters to the employee management and payroll needs of its clients, which mainly range from small to mid-size enterprises. The stock rise over the past two years came due to a 20% growth in revenue, which despite an 8% drop in net margins, translated into a 10% growth in net income. This, combined with a roughly unchanged outstanding share count, led to a 10% growth in earnings on a per share basis.

However, Paychex’s P/E ratio rose from 23x in mid-2018 to around 24.5x in mid-2020. While its P/E has risen further to roughly 26x currently, given the volatility of the current situation, there is significant possible downside for Paychex’s multiple, especially when compared with previous years: 23x in 2018, and 24.5x as recently as mid-2020.

So what’s the likely trigger and timing to this downside?

The global spread of Coronavirus, and the resulting lock downs and quarantine means that a lot of businesses are struggling, and may want to cut costs. Due to this, Paychex could find it difficult to acquire new clients, and at the same time some of their existing clients might also want to shift HR and payroll processing activities in-house, instead of outsourcing. Also, since most of Paychex’s clients are small and mid-size businesses, it is likely a few of them may also have had to shut up shop during the crisis. We believe Paychex’s Q1 ’21 results in October will confirm the hit to its revenue from a combination of the above factors. It is also likely to accompany a lower Q2-2021 guidance.

Regardless, if there isn’t clear evidence of containment of the virus anytime soon, we believe the stock will see its P/E multiple decline from the current level of 26x to around 23x, which combined with a slight reduction in revenues and margins could result in the stock price shrinking to as low as $70.

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