Paychex Stock Too Expensive At $76?

Paychex stock (NASDAQ: PAYX) is down around 8% since the beginning of this year, and at the current price of around $77 per share, we believe Paychex stock has a significant downside.

Why is that? Our belief stems from the fact that Paychex’s stock remains about 22% higher than the low seen in early 2018. Our dashboard What Factors Drove 21% Change In Paychex Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

Some of this rise over the past 2 years is justified by the roughly 20% growth seen in Paychex’s revenues, which translated into a further 25% growth in Net Income, largely due to a lower effective tax rate (34.3% in 2017 vs 24.3% in 2019). This further led to a 25% rise in earnings on a per share basis, as the outstanding share count was roughly unchanged.

Finally, Paychex’s P/E ratio rose from about 27x at the end of 2017 to 29x at the end of 2019. While Paychex’s P/E has dropped to 26.6x now, given the volatility of the current situation, there is additional possible downside for Paychex’s multiple when compared to levels seen in the past years – P/E of 20x in 2015 and 22x as recently as 2018.

So what’s the likely trigger and timing to this downside?

The global spread of Coronavirus, and the resulting lock downs and quarantine means that a lot of businesses are struggling, and many will want to cut costs drastically. Due to this, Paychex will find it difficult to acquire new clients, and it’s likely that some of their existing clients might also want to shift HR and payroll processing activities in-house, instead of outsourcing. We believe Paychex’s Q4 results in July will confirm the hit to its revenue. It is also likely to accompany a lower 1H-2021 guidance.

If there isn’t clear evidence of containment of the virus at the time of the earnings announcement, we believe the stock will see its P/E decline from the current level of 27x to around 22x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $60.

While Paychex stock doesn’t seem to have much near term upside, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

Our dashboard forecasting U.S. Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture.
The complete set of coronavirus impact and timing analyses is available here.

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