Price Correction In The Cards For Paychex Stock?

[Updated 06/22/2021]

Paychex (NASDAQ: PAYX) is slated to release its full year 2021 results on June 25 with an expectation of single-digit revenues and earnings expansion – fairly in line with the management’s guidance. Recently, the Bureau of Labor Statistics (BLS) reported that 559,000 jobs were added in May 2021 and the unemployment rate fell to 5.8%. Significant job gains occurred in the leisure and hospitality industry with food services and drinking places registering a sizable share. As the economy recovers from the crisis, demand for payroll processing and HR services is expected to rise – highlighting investor optimism for Paychex stock. However, given the high current valuation multiple (P/E), Trefis believes that the stock is likely to observe a correction. We highlight our estimates for the fourth quarter and full-year 2021 in an interactive dashboard on Paychex Earnings Preview.

[Updated 05/21/2021] – After A Strong Rally, Paychex Stock Has Reached Its Near-Term Potential

The shares of Paychex (NASDAQ: PAYX) have surpassed pre-Covid levels this year, propelled by overall optimism from ongoing vaccination in the U.S. and a revision of earlier provided guidance. Per recent filings, revenues are expected to decline at a low single-digit rate while margins are likely to observe a slight contraction in FY2021. Given the high current valuation multiple (P/E), Trefis believes that the stock has reached its near-term potential. We highlight the key factors driving Paychex’s Valuation in an interactive dashboard analysis and elaborate more on its business in the article below.

The company’s client base increased by 5% since 2018

Paychex is a leading provider of human capital management (HCM) solutions including payroll processing, talent management, and employee benefits functions to small and medium-sized businesses. The company classifies its services across two segments, Management Solutions and Professional Employer Organization (PEO). The Management Solutions segment provides key human capital management services including payroll processing, tax administration, HR solutions, and retirement services. Whereas, the PEO is a comprehensive employment administration solution where employees working for a client are co-employed by Paychex and the client (worksite employees).

Since FY2018, Management Solutions and PEO segment’s revenues have grown by 7.4% and 78%, respectively.  The company serves nearly 680,000 payroll clients across 100 locations in the U.S. and Europe. Given the strong client base, the company’s total revenues have observed only a slight decline in the past three quarters.

The stock looks overvalued given the high valuation multiple

Since 2018, Paychex’s net margins have remained relatively flat at 27.2% assisting strong earnings growth. Given the slight reduction in the company’s top line in 2021, we expect margins to take a hit from high administration expenses. With a slight drop in net margin and lower shares outstanding, we expect Paychex to report an EPS of $3.14 in 2021. Comparing the stock’s current market price with our fair price estimate of $90, the stock looks overvalued.

Is there a better investment than Paychex? Paychex Stock Comparison With Peers summarizes how PAYX compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.

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