Stock Watch: What to look at when investing in Paychex (PAYX)

There has been an increasing demand for effective solutions to manage human resources and maintain enterprise payroll. It has become more significant in today’s world where business leaders are struggling to find and retain talent due to unfavorable labor market conditions and inflationary pressures.

Paychex Inc. (NASDAQ: PAYX), a leading provider of human capital management solutions, is a company that is on a mission to make the job of HR managers and CEOs easier. It helps businesses recruit the right employees and address complex human resource issues, using advanced technology.

In Growth Mode

The New York-based company maintained stable earnings and revenue performance during the pandemic, aided by the demand created by widespread digital transformation. The company has enhanced its market value in the past few years — until the recent market selloff played spoilsport. In 2022, the stock experienced high volatility, though it reached an all-time high mid-year. But PAYX outperformed the broad market quite often during that period.

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Read management/analysts’ comments on quarterly results

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The shares dropped this week despite the company reporting positive second-quarter results, a sign that the market was expecting an even better outcome. However, they bounced back quickly from the short-lived dip and maintained the uptrend since then. But that doesn’t make Paychex a reliable investment option because the high valuation is a dampener when it comes to creating meaningful shareholder value.   

Time to Buy?

That said, returning cash to stockholders has been a priority for the management – it repurchased stock regularly after initiating the program a few years ago and raised dividends almost every year. While the stock’s prospects as a long-term investment are encouraging even now, a better way to approach it is to buy when the price drops.

The continuing volatility in the job market and muted business confidence, due to the economic slowdown, is expected to weigh on Paychex’s finances in the foreseeable future, though the recent improvement on the employment front is encouraging. The ongoing hiring freeze in some sectors and rising instances of corporate layoffs don’t bode well for the company. Also, it is estimated that enterprises would remain cautious in their spending, concerned about the Fed’s hawkish stance and looming interest rate hikes.

From Paychex’s Q2 2023 earnings release:

“We posted solid financial results for the second quarter, with growth of 7% in total revenue and 9% in diluted earnings per share, driven by our strong execution and comprehensive suite of solutions… We continue to leverage our innovative HR technology and advisory solutions to help employers navigate this challenging environment. We’ve helped more than 50,000 of our clients secure available government funding through the Employee Retention Tax Credit program.”

Q2 Outcome

In the second quarter of 2023, Paychex’s revenues increased 7% annually to $1.19 billion, which is in line with analysts’ forecasts. All three operating segments registered growth, driving up adjusted profit to $0.99 per share. The bottom line also topped expectations. The management expects full-year revenues to grow by about 8%.

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Shares of Paychex traded slightly above $115 during Friday’s session, after losing about 12% this year. It has stayed below the 52-week average for most of this month.