Is the Market Overlooking Paychex Stock’s Next Move?

We think Paychex (PAYX) stock could be a good value buy. It is currently trading lower than average valuation, and has reasonable revenue growth and strong margins to go with its modest valuation.

Buying stocks with low valuations or trading well below their peaks but maintaining strong margins allows investors to capture mean reversion and valuation re-rating potential. The downside risk is potentially less because high-margin businesses can sustain earnings and recover faster when sentiment or market conditions improve

What Is Happening With PAYX

PAYX stock is now 37% cheaper based on its P/S (Price-to-Sales) ratio compared to 1 year ago, and also trades at a P/E (Price-to-Earnings) ratio that is below S&P 500 median.

The stock may not reflect it yet, but here is what’s going well for the company. Paychex maintains strong margins, driven by an approximate 83% client retention rate, customized pricing, and efficiencies gained from AI integration. Recent revenue growth benefits from the Paycor acquisition and price realization, though organic growth is challenged by cautious spending among small and medium-sized enterprises and competition. This, coupled with a significant year-to-date stock drop to a 52-week low and slightly lowered full-year guidance, contributes to its current discounted valuation.

PAYX Has Strong Fundamentals

• Reasonable Revenue Growth: 12.4% LTM and 7.9% last 3 year average.
• Strong Margin: Nearly 39.7% 3-year average operating margin.
• No Major Margin Shock: Paychex has avoided any large large margin collapse in the last 12 months.
• Modest Valuation: Despite encouraging fundamentals, PAYX stock trades at a PE multiple of 22.2

Below is a quick comparison of PAYX fundamentals with S&P medians.

*LTM: Last Twelve Months

But What Is The Risk Involved?

While PAYX stock may be a compelling investment opportunity, it’s always helpful to be aware of a stock’s history of drawdown. Paycom (PAYX) showed some serious dips in past crises. It dropped about 51% during the Dot-Com Bubble and 53% in the Global Financial Crisis. The 2018 correction was milder but still a near 17% pullback. Covid slammed it down 44%, and the recent inflation shock caused a 23% drop. The stock has solid fundamentals, but these numbers remind us that even strong companies can take big hits when the market turns. But the risk is not limited to major market crashes. Stocks fall even when markets are good – think events like earnings, business updates, outlook changes. Read PAYX Dip Buyer Analyses to see how the stock has recovered from sharp dips in the past.

For more details and our view, see Buy or Sell PAYX Stock.

Stocks Like PAYX

Not ready to act on PAYX? Consider these alternatives:

1. Accenture (ACN)
2. Humana (HUM)
3. Lululemon Athletica (LULU)

We chose these stocks using the following criteria:

1. Greater than $2 Bil in market cap
2. Meaningfully below 1Y high
3. Current P/S < last few year average
4. Strong operating margin
5. P/E ratio below S&P 500 median

A portfolio of stocks with the criteria above would have performed has follows since 12/31/2016:

• Average 6-month and 12-month forward returns of 12.7% and 25.8% respectively
• Win rate (percentage of picks returning positive) of > 70% for both 6-month and 12-month periods
• Strategy consistent across market cycles

Portfolios Win When Stock Picks Fall Short

Individual stocks can soar or tank but one thing matters: staying invested. The right portfolio can help you stay invested, capture upside and mitigate the downside associated with any individual stock.

The Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has a track record of comfortably outperforming its benchmark that includes all 3 – the S&P 500, S&P mid-cap, and Russell 2000 indices. 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.