Payroll and HR solutions player Paychex (NASDAQ:PAYX) is expected to publish its Q2 FY’23 results on December 22, reporting on a period that saw the U.S. job market remain robust. We expect Paychex’s revenue for the quarter to come in at about $1.2 billion, marking an increase of about 8% year-over-year, marginally ahead of the consensus estimate of $1.19 billion although this would mark a slowdown in growth compared to the last quarter. We project that earnings will stand at about $0.96 per share, compared to a consensus estimate of $0.95. 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 some macro headwinds of late, with U.S. inflation remaining quite high and the Fed continuing with its path of interest rate hikes, Paychex’s business has held up quite well as the labor market remained strong. For Q1 FY’23 (the quarter ended August), Paychex results came in ahead of estimates. Revenue grew 11% year-over-year to $1.21 billion, while adjusted net income rose by 16% to $1.03 per share. Growth was driven by strength in the mid-market, retirement, and HR solutions space. These trends should hold up through Q2 as well. For perspective, over the month of November, nonfarm payrolls rose 263,000 for the month, with the unemployment rate standing at 3.7%. Wages were also up 5.1% versus last year. This should result in an expanding base of payroll clients and continued strong demand for Paychex HR solutions. Paychex has also done a good job of managing its margins so far, despite the inflationary environment. Over Q1, operating margins approached 41.1%, up 20 basis points versus last year, driven by efficiency improvements and a rising revenue base.
That said, we remain neutral on Paychex stock with a $116 price estimate, which is in line with the current market price. There is a relatively 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 11% to 12%, down from a growth rate of 24% over the last fiscal year. Paychex stock also trades at a relatively high multiple of about 28x consensuses 2022 earnings. Although this is justified by the company’s relatively predictable earnings growth and stable dividend, the high valuation might prove a risk for the stock through an economic downcycle. See our analysis of Paychex valuation for more details on what’s driving our price estimate for Paychex stock.
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