Paychex and Cintas Show Surprising Labor Market Resilience

Key Points

• Paychex and Cintas delivered solid earnings reports, indicating a strong labor market despite economic uncertainties.
• Paychex's earnings were slightly above expectations, with a notable acquisition of Paycor, while Cintas showed steady organic growth and increased earnings guidance.
• A resilient labor market could impact the Federal Reserve's interest rate policies, which means investors should expect more volatility.

Paychex Inc. NASDAQ: PAYX and Cintas Corp. NASDAQ: CTAS are two prominent business services stocks. They serve as bellwethers of the labor market. At a time when investors are filled with uncertainty surrounding the economy, both companies delivered solid earnings reports that suggest the labor market may be stronger than it may seem to people on Main Street.

Paychex Expects Growth Through Acquisition

Paychex is a leader in providing human capital management (HCM) solutions for small- and medium-sized businesses including, as its name suggests, payroll processing. The general idea is that if the company is missing on earnings, it will be a harbinger of lower payrolls.

Investors got a mixed report. Earnings per share (EPS) of $1.49 beat expectations of $1.48. Revenue of $1.5 billion was just a tick below the $1.51 billion expected. However, on a year-over-year (YOY) basis, revenue was up 5%, and EPS was better by 8%. Looking forward, the company expects its recent acquisition of Paycor to be accretive to earnings per share.

In discussing the report, management said one of the issues they are hearing from the companies they work for was the inability to find the right people, not a lack of desire to hire.

That doesn’t sound like the metrics of a slowing labor market.

Cintas Continues to Deliver Steady Growth

Cintas is known as a uniform company that provides other services to businesses of all sizes. The company beat on the top and bottom lines, with earnings per share of $1.13 on revenue of $2.61 billion. The top-line number was particularly impressive, showing an 8.4% YOY increase.

Management cited steady organic growth of 7.9%. The company guided to slightly higher EPS for the full year while leaving its revenue forecasts unchanged.

Again, this is not exactly a report that signals an ailing labor market.

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Why Good News Could Be Bad News

Investors hate uncertainty, and uncertainty is the watchword for 2025: tariffs, inflation, interest rates, and a possible recession. Yet, investors continue to get mixed signals about the labor market.

Employment and inflation are the two parts of the Federal Reserve’s mandate. Higher levels of unemployment are historically a deflationary signal that leads to lower interest rates. Conversely, lower unemployment typically leads to higher inflation, which generally causes the Fed to raise interest rates.

That's been the situation facing the Fed over the past year. Main Street may not believe it, but the labor market is holding up. That means inflation is still rising at a rate above the Federal Reserve’s preferred 2% target. That means the Fed is less inclined to lower interest rates, which could give the consumer some relief.

Analysts Give the Nod to CTAS Stock

Both Paychex and Cintas stocks have recently retreated from 52-week highs. However, after the respective earnings reports, analysts appear to have a more positive outlook for CTAS stock. Although the stock is trading within 1% of its $207.57 consensus price target, several analysts have raised their price targets, suggesting that the stock may make another run at the 52-week high.

By contrast, PAYX stock is trading above its consensus price target, and analysts give it a consensus Reduce rating. It’s important to note that Paychex has been the target of short sellers in recent months. That’s an additional concern for investors.