What To Expect From Paychex Q4 Results?

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Payroll and HR solutions player Paychex (NASDAQ:PAYX) is expected to publish its Q4 FY’24  results on June 26, reporting on a period that saw the U.S. job market remain relatively buoyant. We expect earnings for the quarter to come in at about $1.06 per share, marginally ahead of consensus estimates, while revenues are likely to grow about 5% year-over-year to $1.3 billion. So what are some of the trends that are likely to drive the company’s earnings for the quarter?

Paychex’s business is likely to hold up quite well as the labor market remains strong. Employers in the U.S. added 272,000 jobs in May, an increase from 175,000 jobs added in April. This could indicate that employers remain confident about the broader economic outlook, driving up demand for Paychex services which include helping businesses with payroll, payroll taxes and HR solutions such as applicant tracking, and the onboarding of new hires. We expect the company’s management solutions business to be the primary driver of growth, led by a growing number of clients served across its human capital management solutions, as well as higher product penetration of its HR Solutions and Retirement offerings. Paychex has also done a good job of managing its margins so far, despite the inflationary environment. Over Q3 FY’24, operating margins touched 45.1%, up 80 basis points versus last year, driven by efficiency improvements and a rising revenue base. We could see similar trends over Q4 as well.

PAYX stock has shown strong gains of 30% from levels of $95 in early January 2021 to around $125 now, vs. an increase of about 45% for the S&P 500 over this roughly 3-year period. However, the increase in PAYX stock has been far from consistent. Returns for the stock were 46% in 2021, -15% in 2022, and 3% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that PAYX underperformed the S&P in 2023.

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In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the industrial sector including GE, CAT, and HON, and even for the mega-cap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could PAYX face a similar situation as it did in 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

We remain neutral on Paychex stock with a $122 price estimate, which is marginally below the current market price. Paychex stock trades at a relatively high multiple of about 27x consensuses FY’24 earnings. Although this is justified by the company’s relatively predictable earnings and stable dividend, the high valuation might prove a risk for the stock through a potential economic downcycle. Paychex is focused more on small and medium-sized businesses, which are more dependent on consumer spending and there could be some concerns on this front, as consumer spending growth in the U.S. slows. Consumer spending rose by about 0.2% in April after a rise of about 0.7% in March. Moreover, the unemployment rate in the U.S. has also seen a bit of an uptick coming in at 4% in May, up from 3.9% in April. This could also impact the company’s performance down the line. See our analysis of Paychex valuation for more details on what’s driving our price estimate for Paychex stock.

Returns Jun 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 PAYX Return 5% 6% 107%
 S&P 500 Return 3% 14% 143%
 Trefis Reinforced Value Portfolio 2% 6% 653%

[1] Returns as of 6/25/2024
[2] Cumulative total returns since the end of 2016

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