Expecting Gains In Paychex Stock Ahead Of Earnings?

[Updated 09/28/2021]

In August, the overall unemployment rate sequentially declined by just 0.2% to 5.2%. As new infections surged, unemployment figures in the leisure and hospitality sector remain fairly stable with a decline reported by food services. Notably, the leisure and hospitality sector accounts for 20% of the 8.4 million unemployed persons. The shares of Paychex (NASDAQ: PAYX) observed an uptick after the company reported strong FY2022 guidance figures in June. Last fiscal, the client base increased by 4% and the client retention ratio improved by 2-percentage-points to 85%. Thus, investor optimism pushed Paychex stock beyond pre-Covid levels as highlighted in our previous article, What Is Driving The Rally In Paychex Stock? Considering the slow job growth figures in the leisure and hospitality sector, Trefis believes that Paychex stock is likely to observe further correction. We highlight the quarterly trends in revenues, earnings, stock price, and expectations for Q1 FY2022 in an interactive dashboard analysis, Paychex Earnings Preview.

[Updated 09/13/2021] – Finding Paychex Stock Expensive? Why Not Consider Workday

After losing 2.7% in the past month, Paychex stock (NASDAQ: PAYX) looks fairly priced based on its current P/S multiple of 10.2x. However, the market is pricing Paychex’s competitor Workday (NASDAQ: WDAY) at a slightly higher P/S multiple of 11.7x. Does that make Paychex a better buy over Workday? Comparing a slew of factors such as historical revenue growth, returns, and risk, Trefis believes that Workday stock has more room for growth despite its higher P/S multiple. The price-to-sales or P/S multiple for a company is higher when the sales growth is higher, and it has a demonstrated ability to translate those sales to profits, with an expectation to do so consistently. In the past few years, Workday’s revenues have grown at an annual rate of 26.4% and its operating cash margins have remained comparable to Paychex’s. Interestingly, both companies have comparable revenues while there is a sizable difference in market capitalization. We highlight more factors indicating Paychex’s high current valuation in the article, Should You Book Profits In Paychex Stock? Our dashboard Paychex vs. Workday: Similar Revenue; Which Stock Is A Better Bet? details the fuller picture, parts of which are summarized below.

1. Revenue Growth

Workday’s growth has been much stronger than Paychex’s over the last three years, with Workday’s revenue expanding at an average rate of 26.4% per year from $2.1 billion in FY2018 to $4.3 billion in FY2021, versus Paychex’s revenue which grew by 8.6% per year from $3.2 billion in FY2017 to $4.1 billion in FY2021.

• Workday’s growth has been driven by a strong demand of its subscription services, which primarily consists of fees for cloud applications for financial management, spend management, human capital management, and analytics. Revenues from subscription services account for almost 85% of the company’s top line and have more than doubled in the past four years.
• Paychex’s growth has been driven by a rising client base and consistent improvement in customer retention percentage. The company’s total client base increased by 12% from 605,000 in 2017 to 680,000 in 2020 – assisting demand for management solutions and professional employer organization services. Notably, the company caters to around 8.8% of the total 8 million employer firms in the U.S.
• While Paychex provides integrated human capital management services including payroll, benefits, and insurance to businesses, Workday offers enterprise cloud applications for human resources and the financial services industry.

2. Returns (Profits)

Coming to returns, Paychex has been consistently providing returns to investors as dividends and share repurchases whereas Workday’s focus has been on business expansion. Workday reports a negative operating margin primarily due to non-cash share-based compensation expenses.

• In FY2021, Workday reported -5.8% of operating margin and -6.5% of net income margin. However, the operating cash margin stood at 30% as share-based compensation expenses accounted for 22% of the total operating costs. With $1.26 billion of operating cash, the company incurred $253 million of capital expenses and invested $988 million in marketable securities.
• Whereas, Paychex reported 36.3% of operating margin and 27% of net income margin in FY2021. The operating cash margin stood at 35% as non-cash expenses were low. With $1.4 billion of operating cash, the company incurred $142 million of capital expenses and returned $889 million as dividends to shareholders.

3. Risk

Workday looks like the riskier of the two companies from the perspective of financial leverage.

• Workday’s debt to equity ratio stood at over 54% in FY2021, as it has been taking on debt to fuel business expansion. In comparison, Paychex’s debt to equity is much lower at 29%.
• However, both companies have adequate liquidity to manage operations and service debt.