Will Paychex Stock Observe A Further Correction?

PAYX: Paychex logo

Rising geopolitical risk premium has led to a contraction in broader market indices since January. However, the unemployment rate stands at 4% as per the recent household survey – highlighting strong jobs growth despite two coronavirus infectious waves in the past 12-month period. The shares of Paychex (NASDAQ: PAYX) have been trending downward in recent months – fairly in-line with peers ADP and Paycom. Per a presentation to analysts, the company is targeting a 10-11% top line growth supported by a rising client base and a high customer retention ratio in FY2022. Our interactive dashboard on Paychex’s valuation highlights the historical trends in revenues, earnings, valuation multiple, and forecast for FY2022. Notably, the stock’s current valuation multiple (P/E) stands higher than pre-pandemic levels – indicating a likelihood of further correction.

Paychex’s revenues have grown at an average rate of 7% per year from $3.1 billion in FY2017 to $4 billion in FY2021, assisted by a rising client base and growing demand for PEO (professional employer organization) services.  However, the net margin remained relatively flat between 26-28% – resulting in a 7% annual growth in earnings per share. The stock’s valuation multiple (P/E) has been around 30 in the past few years. With revenues of $4.5 billion, net margin of 28%, and a forward P/E multiple of 29, Trefis estimates Paychex’s valuation at $104 per share – around 12% below the current market price. A comparison table of PAYX’s valuation multiple (P/E) with its peers is depicted below.

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Job Market Trends

In January 2022, the Bureau of Labor Statistics (BLS) reported that 467,000 jobs were added and the unemployment rate was 4%. Employment in professional & business services, retail trade, transportation & warehousing, and mining & construction stand higher or comparable to pre-pandemic levels (February 2020). However, the employment in the leisure and hospitality industry still remains 10% lower, or 1.8 million fewer jobs, than February 2020. The leisure and hospitality industry observed 7.7 million job losses accounting for 38% of the total employment loss during the peak of the pandemic in April 2020. (related: Will ADP Stock Trend Lower?)

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 Returns Mar 2022
MTD [1]
YTD [1]
Total [2]
 PAYX Return 0% -13% 96%
 S&P 500 Return 0% -8% 95%
 Trefis MS Portfolio Return 0% -10% 254%

[1] Month-to-date and year-to-date as of 3/1/2022
[2] Cumulative total returns since the end of 2016

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