What Is Driving The Rally In Paychex Stock?

PAYX: Paychex logo

The shares of Paychex (NASDAQ: PAYX) have gained 30% since the February 2020 levels despite a downtrend observed in the travel & tourism industry. Notably, the employment in the leisure and hospitality industry remains 10.3% below February 2020 levels. The rally in Paychex stock has largely been driven by a rising client base and consistent improvement of customer retention rate. Per recent filings, the company reported a client base of 710,000, around 8.8% of the total 8 million employer firms in the U.S. While the payroll process and human capital management services market is highly competitive, Paychex’s growing client numbers and expanding top line is a boon for shareholders. However, the stock looks overvalued considering the historical trends in valuation multiple (P/E) and potential earnings figures in the coming years. Trefis highlights the historical trends in revenues, earnings, stock prices, and valuation multiple in an interactive dashboard analysis, Paychex Valuation.

A quick look at key financial and operating metrics

Paychex’s revenues have been growing at a 9% annual rate from $3.2 billion in FY2017 to $4.0 billion in FY2020. The company’s two operating segments, Management Solutions and PEO services observed an average revenue growth 3.4% and 33%, respectively, over the same period. Moreover, the total client base increased from 605,000 in 2017 to 680,000 in 2020, assisting a rise in worksite employees and other services such as health benefits & retirement plans.

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Management Solutions segment provides key human capital management services including payroll processing, tax administration, HR solutions, and retirement services. The PEO (professional employer organization) is a comprehensive employment administration solution where employees working for a client are co-employed by Paychex and the client (worksite employees).

Thus, the net earnings observed a 10% annual expansion from $817 million in FY2017 to $1 billion in FY2021 as margins remain fairly stable. The company has also been consistently returning capital to shareholders as dividend payouts. The annual dividend per share has increased at an annual rate of 10% from $1.84 in FY2017 to $2.48 in FY2020.

Is the stock a good pick?

Per analyst presentation, Paychex’s FY2022 revenues are likely to grow by 7% with relatively flat net margins. Considering the year-end stock price figures, P/E multiple has increased from 29.7 in 2017 to 31.3 in 2020. With $3.05 FY2021 earnings per share and current market price of $115, the current valuation multiple (P/E) of 37 is much higher than historical numbers. Moreover, the current dividend yield of 2% is low on assuming $2.64 of annual dividend payout.

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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