Payroll and HR solutions player Paychex (NASDAQ:PAYX) is expected to publish its Q1 2023 results on September 28. We expect Paychex’s revenue for the quarter to come in at about $1.2 billion, marking an increase of about 11% year-over-year, marginally ahead of the consensus estimate of $1.19 billion. We project that earnings will stand at about $0.98 per share, compared to a consensus estimate of $0.97. So what are some of the trends that are likely to drive the company’s results? See our interactive dashboard analysis on Paychex Earnings Preview for more details on how PAYX revenues and earnings are likely to trend for the quarter.
Although there have been considerable macro headwinds of late, with U.S. GDP contracting over the last two quarters straight and the Fed continuing with its path of interest rate hikes, Paychex’s business has held up quite well as the labor market has remained strong. This has resulted in an expanding base of payroll clients and continued demand for the company’s HR solutions. For Q4 FY’22 (the quarter ended May) Paychex results came in ahead of estimates, with the company’s key operating metrics trending higher. Total worksite employees rose 18% versus last year to 2 million, with client retention standing at a strong 88%. The company had about 730,000 total payroll clients and over 100,000 retirement clients as of the end of May. Now, the job market remained relatively strong over the last quarter as well. In August, employers in the U.S. added about 315,000 jobs, with the unemployment rate standing at just about 3.7%, down from 5.2% in the year-ago period and this is likely to bode well for Paychex’s business. However, margins will be a key factor to watch. While adjusted operating margins remained roughly flat year-over-year at 34.4% in Q4 FY’22, it’s possible that inflationary pressure could impact the metric a bit over Q1 FY’23.
We remain neutral on Paychex stock with a $110 price estimate, which is about 4% below the current market price. There is a strong probability that the U.S. will enter a recession in the near term, and the company is also projecting that sales will cool off versus historical levels, guiding a growth rate of 7% to 8% for FY’23, down from close to 14% growth in FY’22. Management expects that adjusted earnings for FY’23 are expected to grow at 9% to 10%, down from a growth rate of 24% over the last fiscal year. Paychex stock also 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 through an economic downcycle.
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