Paychex Stock: Topping Out (NASDAQ:PAYX)

Payroll and payday concept with calculator and calendar.

Mohamad Faizal Bin Ramli/iStock via Getty Images

“The difference between ordinary and extraordinary is that little extra.” – Jimmy Johnson

Today, we put Paychex, Inc. (NASDAQ:NASDAQ:PAYX) in the spotlight for the first time. Insiders seem to be large sellers of shares of late. In addition, as our economy heads into a potential recession, the equity looks richly valued and the stock also appears to be topping out. Hold tight or sell? An analysis follows below.

Stock Chart

Seeking Alpha

Company Overview:

Paychex, Inc. is based in Rochester, NY. The company provides payroll and human capital management (“HCM”) solutions to 730,000 total payroll clients, approximately two million worksite employees served through their HR outsourcing services and over 100,000 retirement clients. The stock currently trades at around $125.00 a share and sports an approximate market capitalization just north of $45 billion.

Company Capabilities

June Company Presentation

Second Quarter Results:

On June 29th, the company posted its fiscal fourth quarter results. The company delivered non-GAAP earnings per share of 81 cents a share, two pennies above estimates. Revenues rose nearly 11% on a year-over-year basis to $1.14 billion, some $30 million above the consensus.

4Q2022 Highlights

June Company Presentation

Management Solutions revenue was the bulk of overall sales and increased 12% to $845.3 million for the fourth quarter and rose 14% to $3.4 billion for the year. The rest of the company revenues came from Professional Employer Organization (“PEO”) and Insurance Solutions. This increased 10% to $284.3 million for the quarter and was up 14% to $1.1 billion for the fiscal year.

Client retention remained above management expectations as well as pre-pandemic levels. All in all, a solid quarter to end the fiscal year. Management provided forward FY2023 guidance that called for revenue to grow in the range of 7% to 8% this fiscal year, which was pretty much in line with analyst expectations.

Forward Guidance

June Company Presentation

Analyst Commentary & Balance Sheet:

The analyst community is not sanguine on the company’s prospects right now. Earlier this week, since late June, ten analyst firms including Morgan Stanley and JPMorgan have reissued Hold, Sell or Neutral ratings on the stock. Price targets proffered range from $110 to $133. Only Cowen & Co. ($135 price target) and Credit Suisse ($140 price target) have maintained Buy ratings on PAYX.

Only approximately three percent of the shares are currently held short. Insiders have quickened the pace of the sales in recent months. Numerous insiders have sold just over $10 million worth of stock in aggregate since July. The last insider purchase in the equity was back in October 2018.

Return of Capital

June Company Presentation

The company boosted its quarterly dividend by 20% in April of this year to 79 cents per share per quarter. During the company’s final quarter of FY2022, Paychex returned some $430 million to shareholders in the form of dividends and stock repurchases. The company’s balance sheet is in good shape.

Balance Sheet

June Company Presentation

Verdict:

Paychex, Inc. is a well-run firm. Unfortunately, the stock seems non-investable at current trading levels. Based on a valuation basis, the stock is valued at approximately 30 times trailing earnings, has a three percent free cash flow yield and trades at ten times revenues for a firm that is projected to have mid- to high-single-digit sales growth in FY2023. The stock pays a just north of three percent dividend yield but that probably does not provide a floor here at these valuations. With a long-term earnings growth rate of 10%, PAYX has a PEG ratio of roughly three here.

Long term earnings growth

June Company Presentation

Add in the recent insider selling and a pessimistic analyst community, there is no reason to own PAYX at these levels. Given the country looks likely heading into a recession, if we are not already in one (the last two quarters of GDP showed a contraction), the stock might make a good short. The stock cratered during the pandemic as employment fell drastically. Obviously, we won’t see those kinds of job losses this time around. However, the jobs market is always a lagging indicator. At 20 times trailing earnings, the stock would trade around $85 a share. I plan to short PAYX down to the $100 level as falling job growth, which I expect in the coming months, should trigger a decent decline in the shares.

“Find a job you enjoy doing, and you will never have to work a day in your life.” – Mark Twain

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