Why Paychex Stock's Dip is the Best Opportunity in Today's Cycle

June 27, 2024 at 07:09 AM EDT

Paychex logo on smartphone screen

After the company reported its full-year 2024 earnings results, shares of Paychex Inc. (NASDAQ: PAYX) are trading lower by as much as 5.5% in the morning’s trading session. The initial reaction to earnings came as a surprise, as the actual results were nothing to bearish about, although management’s guidance could have disappointed those used to easy profits.

The technology sector, which Paychex is part of, ran high relatively quickly due to stocks like NVIDIA Co. (NASDAQ: NVDA) riding on the artificial intelligence boom. Some investors may have wrongly assumed that any stock with a technology aspect would follow suit. That is where savvy investors can take today’s earnings dip on Paychex stock and suit up for a potential buying opportunity.

An argument could be made by bearish traders, pointing to Paychex’s services being essentially the same as its competitor Automatic Data Processing Inc. (NASDAQ: ADP), with the caveat being that Automatic Data Processing holds a larger market share over Paychex. However, this fact also makes Paychex the better pick in today’s economic cycle.

Analysts Predict Double-Digit Upside for Paychex Stock Despite Earnings Dip

After a stock sells off as much as Paychex stock did, it’s typical for Wall Street to back off from them and even relay some bearish outlooks. This is why investors should keep ratings at the forefront of their minds in this bearish price action, as Paychex stock traded down 10% from its 52-week high in the run-up to earnings.

Those at the Royal Bank of Canada kept their valuation forecasts for Paychex stock at $130 a share, daring it to rally by over 10% from its current level. While this remains a bold move from analysts, they aren’t the only ones on Wall Street keeping their chins up for the stock’s future.

The Vanguard Group, Paychex’s largest shareholder, boosted its stake by 0.4% over the past quarter. While that may not sound like much, it brought the asset manager’s net investment up to $3.75 billion today. Over the past 12 months, the rest of institutional ‘smart money’ flooded Paychex with $5 billion in inflows.

These institutions and analysts must have an excellent reason to continue backing this stock, and some of those reasons are revealed to investors through the company’s quarterly earnings results.

Reality Check: The Numbers Speak, Unrealistic Expectations Deceive

Overall, the quarter showed continued strength for Paychex’s business, despite what bearish traders may say, or even bored bulls used to the stratospheric rallies in other tech names may feel about this stock.

Net revenue grew by 5% over the year, most of which came from insurance solutions for new hires. While some fundamental investors may look at the 18-month contractions in the ISM manufacturing PMI index as a bearish sign for employment – affecting Paychex -the reality is that this company’s audience is elsewhere.

This brand serves small to medium-sized businesses rather than large corporations, where Paychex has an advantage over Automatic Data Processing. So, instead of looking at the big business cycle, here’s what the National Federation of Independent Business (NFIB) says.

The Future Looks Bright for Paychex Stock, According to Management

Business optimism, an index reading posted by the NFIB, shows that the 2023 low sentiment could now be over. In the past quarter, this index has risen from 88.5% to 90.5%, meaning that more business activity and demand are expected ahead for these entities, and that’s good for Paychex’s earnings.

Speaking of which, the past quarter delivered earnings per share (EPS) growth of 9% to investors. Rising optimism can lead most to believe that the company can let out a similar quarter coming up, if not better, making current projections for only 5.5% EPS growth seem to be on the conservative end of the spectrum.

Management agrees as they provided 2025 financial guidance showing potential for 7% EPS growth. To back these expectations, more than just relying on boosted sentiment, management laid out $169.2 million to repurchase up to 1.5 million shares in the open market.

When management buys back stock, it sends a twofold message to the market. First, they believe that the stock is currently undervalued compared to where it should be, and second—sort of redundant—they expect to see bullish price action in the near term.

More than that, the underlying financials were healthy – and strong – enough to enable a $1.3 billion dividend payout approval, or $3.65 a share. Considering where the stock trades today, this payout would translate into an annual dividend yield of up to 3.3%.

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Why Paychex Stock's Dip is the Best Opportunity in Today's Cycle

Analysts Predict Double-Digit Upside for Paychex Stock Despite Earnings Dip

Reality Check: The Numbers Speak, Unrealistic Expectations Deceive

The Future Looks Bright for Paychex Stock, According to Management

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