Time To Book Profits In Paychex Stock?
Improving macroeconomic conditions and strong revenue guidance has been a boon for Paychex stock (NASDAQ: PAYX) since the earnings announcement in December 2021. The stock observed a sell-off along with broader markets in January 2022 over concerns of rising inflation and geopolitical tensions between Russia & Ukraine. The company expects 10-11% total revenue growth in FY2022 – higher than the 6-7% observed in the past few years. Given a strong likelihood of Paychex’s revenues to grow at historical pace in the coming years, Trefis believes that the stock is overvalued. Notably, the stock’s current valuation multiple (P/E) stands higher than the pre-pandemic levels. We highlight the quarterly trends in revenues, earnings, stock price, and expectations for Q3 FY2022 in an interactive dashboard analysis, Paychex Earnings Preview.
Long-term trends and operational metrics
Paychex’s two operating segments, Management Solutions and Professional Employer Organization, contribute 75% and 25% of total revenues, respectively. Management Solutions segment provides human capital management services including payroll, ancillary services, HR outsourcing solutions, etc. The PEO segment provides HCM (human capital management) solutions when an employee working for a client is co-employed by Paychex (known as a worksite employee). The company’s top line has been expanding at a CAGR of 6.5% from $2.9 billion in FY2016 to $4 billion in FY2021. Notably, the growth rate for the PEO segment has been much stronger at 10% p.a. compared to Management Solutions’ 3% p.a. in the last five years. The company’s total client base increased by 17% from 605,000 in FY2017 to 710,000 in FY2021. Moreover, the company caters to around 8.8% of the total 8 million employer firms in the U.S.
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- With The Job Market Holding Up, What To Expect From Paychex Q2 Results?
Trends In Job Market
In March 2022, the Bureau of Labor Statistics (BLS) reported that 678,000 jobs were added in February and the unemployment rate dipped to 3.8%. While the employment in professional & business services, retail trade, and transportation & warehousing has recovered to considerable levels, the employment in leisure and hospitality is down by 9% since February 2020. The leisure and hospitality industry observed 7.7 million job loses accounting for 38% of the total employment loss during the peak of the pandemic in April 2020. (related: Is Paycom Stock A Good Pick To Realize Long-Term Gains?)
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| Returns | Mar 2022 MTD [1] |
2022 YTD [1] |
2017-22 Total [2] |
| PAYX Return | 6% | -8% | 107% |
| S&P 500 Return | 1% | -7% | 98% |
| Trefis MS Portfolio Return | 2% | -9% | 259% |
[1] Month-to-date and year-to-date as of 3/28/2022
[2] Cumulative total returns since the end of 2016
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