Let Paychex Stock Work Hard For You

Key Points

• The latest revenue numbers are optimistic for a variety of reasons.
• Analysts are holding onto the stock, despite some evidence, and see it going higher.
• There's a lot less chance of a significant correction than there was going into the report.

Labor market stocks like Paychex (NASDAQ: PAYX), Automatic Data Processing (NASDAQ: ADP), and even Cintas (NASDAQ: CTAS) have been sustaining growth and outperforming expectations in the face of sketchy economic conditions, and that trend is not ending. The latest reports from Cintas and Paychex show that the employment situation is not only strong but also strengthening. Both companies beat on the top and bottom line and increased their dividends, but one stands out as a winner for investors. Most labor-related stocks are trading at high multiples right now, about double the broad market average, because of their underlying strength and outlook for dividend payments. 

Paychex is no exception, trading at 28X its earnings, but it is a value compared to Cintas if not ADP, which trade at 32X and 28X respectively, and it is a better yield at 2.7%. Both ADP and Cintas pay respectable dividends with yields of 1.8% and 1.15%, and they come with a healthy outlook for dividend growth, but Paychex shines with a better yield and equally healthy outlook for dividend growth. 

Paychex Has Strong Quarter, Margins Improve 

Paychex had a great quarter posting revenue of $1.21 billion or up 12% versus last year. The revenue gains are driven by a combination of increased client count and increased head-count per client that drove revenue 340 basis points above the Marketbeat.com consensus estimate as well. On a segment basis, both the Management Solutions and PEO segments saw growth, with Management Solutions up 12% versus a smaller 8% gain in PEO, and there was also margin improvement. 

Moving down to the earnings data, the company reported a 12% increase in operating income that has an operating margin of 41.1%, compared to only 40.9% last year. The improvement is slim indeed, but it helped to amplify the topline strength and drive adjusted EPS to $1.03 or up 16% versus last year and $0.06 better than expected. The takeaway is the dividend payment is as safe as ever and is coupled with an improved outlook for earnings this fiscal year. 

The company restated guidance for the year, maintaining its revenue outlook and improving the outlook for earrings. The company is expecting revenue growth in the range of 7% to 8% versus the consensus of 7.72% and for earnings in the range of up 11% to 12%. This compares to the prior guidance for earnings to be up 9% to 10% and the consensus target of up 9.46%, and there is a chance for upside surprises given the latest employment data. The NFP shows month-to-month employment gains are running in the range of 300K, which is strong relative to pre-COVID levels, and the JOLTs indicate job openings are trending near record highs and above 11 million. 

The Analysts Hold Onto Paychex 

The analyst's activity is a little mixed for Paychex, but the takeaway is they are holding the stock and see it moving higher. The consensus of 12 analysts is a firm Hold leaning toward Buy with a price target about 11% above the recent price action. The consensus sentiment has been holding steady, and that did not change following the earnings release, but the price target is trending higher. The consensus price target is trending higher in the 12, 3, and 1-month comparisons, and it could move even higher over the next quarter or two. 

The Technical Outlook: Paychex Trades At Bottom Of Range 

The price action in Paychex has been range bound at recent highs, and that situation has not changed. The post-release price action did confirm support at the bottom of the range, however, so there is less chance of a significant correction than there was going into the report. Assuming the market continues to support the stock at this level, it should continue to move within the range until more news comes out. If not, this stock could fall below support and move down to the $100 to $90 range, where it would be a better value and yield.