Paychex (NASDAQ:PAYX) stock has declined by about 9% year-to-date, outperforming the S&P 500 which remains down by about 17% over the same period. The company’s performance has been pretty strong in recent quarters, driven by an expanding base of payroll clients and strong demand for HR Solutions, given the strong U.S. labor market. For perspective, over the month of August, employers added about 315,000 jobs, with the unemployment rate standing at just about 3.7%. Paychex Q4 FY’22 results (quarter ended May) also came in ahead of estimates, with sales growing by 11% year-over-year to $1.14 billion and adjusted earnings rising by 24%. The company’s key operating metrics have also been trending higher. Total worksite employees rose 18% versus last year to 2 million, with client retention standing at a strong 88%.
However, there are some concerns that the momentum could cool off with economic headwinds mounting. U.S. GDP has contracted over the last two quarters straight and the Fed has indicated that it could continue with its path of interest rate hikes despite the tough economic situation as it looks to fight inflation. Businesses are also facing pressure from high energy prices and input costs and this could result in lower spending.
Now, Paychex should navigate the current headwinds reasonably well, considering that the company provides a host of essential services and tools for businesses to manage payroll, human resources functions, track benefits, and insure employees. For example, the company’s revenues largely held up through Covid-19 and the Great Recession showing little cyclicality. However, growth is projected to slow a bit going forward with the company guiding sales growth of 7% to 8% for FY’23, down from close to 14% in FY’22. Also, Paychex still trades at a relatively high multiple of about 30x consensus 2022 earnings. While this is justified by the company’s relatively predictable earnings growth and stable dividend, the high valuation could prove a risk for the stock if the economy remains depressed.
We value Paychex stock at about $111 per share, which is about 9% below the current market price. See our interactive analysis on Paychex Valuation: Expensive Or Cheap? for more details. See our dashboard on Paychex Revenue for an overview of Paychex’s business model and how its revenues are likely to trend.
|S&P 500 Return||1%||-16%||78%|
|Trefis Multi-Strategy Portfolio||0%||-15%||235%|
 Month-to-date and year-to-date as of 9/8/2022
 Cumulative total returns since the end of 2016