After Reporting Better Than Expected Q2 Earnings, is Paychex Stock a Buy?

Integrated human capital management (HCM) solutions provider Paychex, Inc. (PAYX) in Rochester, N.Y., serves more than 700,000 clients across the United States and Northern Europe. Its shares soared to hit their all-time high of $137.20 on Dec. 23, 2021, after the company posted better than expected earnings in its fiscal second quarter (ended November 30, 2021). Its total revenue increased 13% year-over-year to $1.11 billion in the quarter, while its adjusted EPS came in at $0.91, up 25% year-over-year.

The stock has gained 24.7% in price over the past three months and 10.8% over the past month to close yesterday’s trading session at $135.64.

However, the shares are currently trading 1.1% below their all-time high. PAYX faces intense competition in the business services space, such as Automatic Data Processing, Inc. (ADP). Furthermore, the ongoing labor shortage could adversely impact its business. So, we think PAYX’s near-term prospects look uncertain.

Here are the factors that could influence PAYX’s performance in the upcoming months:

Positive Developments

In October, PAYX enhanced its Paychex Flex Document Management tool functionality to help employers who choose to track vaccination status to restrict access and maintain the confidentiality of information. This is expected to help businesses as they continue to navigate the impacts of the COVID-19 pandemic.

PAYX acquired Flock in the same month. The company’s president and CEO, Martin Mucci, said, “Paychex provides HR services to more than 1.7 million worksite employees and is among the 30 largest insurance agencies in the U.S. The combination of Paychex’s full-service HR and benefits capabilities and Flock’s innovative platform will position us for continued growth and expansion in the marketplace.”

Stable Dividend Growth

PAYX’s dividends have grown consistently over the past 11 years. Its dividend payout has grown at an 8.1% CAGR over the past five years and 6.1% over the past three years. While its four-year average dividend yield is 2.89%, the current dividend translates to a 1.95% yield. PAYX paid a $0.66 per share quarterly dividend on Nov. 29, 2021, amounting to an annual dividend of $2.64.

Lofty Valuation

In terms of forward non-GAAP P/E, PAYX’s 37.02x is 50.5% higher than the 24.60x industry average. The stock’s 3.82x forward non-GAAP PEG is 121.1% higher than the 1.73x industry average. And its  forward EV/S, EV/EBITDA, and P/S of 10.74x, 24.45x, and 10.77x, respectively, are higher than the 4.23x, 16.51x, and 4.13x industry averages.

POWR Ratings Reflect Uncertainty

PAYX has an overall C rating, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. PAYX has a C grade for Sentiment, which is in sync with unfavorable analyst sentiment. Wall Street analysts expect the stock to hit $133.13 in the near term, which indicates a potential decline of nearly 2%.

Furthermore, it has a D grade for Value, which is consistent with its higher-than-industry valuation ratios.

PAYX is ranked #21 out of 46 stocks in the Outsourcing - Business Services industry. Beyond what I have stated above, we have also given the stock grades for Growth, Momentum, Stability, and Quality. Click here to get all PAYX’s ratings.

Bottom Line

PAYX’s shares soared in price after the company posted top- and bottom-line growth in its latest quarter. Its revenue and EPS are expected to increase 6.6% and 7.2%, respectively, year-over-year to $4.78 billion and $3.87 in fiscal 2023. However, the stock seems to have peaked and looks overvalued at the current price level. So, we think it could be wise to wait for a pullback before buying into the stock.

How Does Paychex (PAYX) Stack Up Against its Peers?

While PAYX has an overall POWR Rating of C, one  might want to consider investing in Outsourcing - Business Services stocks having an A (Strong Buy) rating: TriNet Group, Inc. (TNET), Ituran Location and Control Ltd. (ITRN), and ARC Document Solutions, Inc. (ARC).

PAYX shares were unchanged in premarket trading Tuesday. Year-to-date, PAYX has gained 49.22%, versus a 29.35% rise in the benchmark S&P 500 index during the same period.

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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