Time to book profits on Paychex shares?

Improving macroeconomic conditions and a good revenue orientation have been a boon for Paychex stock (NASDAQ: PAYX) since the December 2021 earnings announcement. The stock saw a sell-off as well as broader markets in January 2022 due to concerns over rising inflation and geopolitical tensions between Russia and Ukraine. The company expects total revenue growth of 10-11% in fiscal 2022, which is higher than the 6-7% seen in recent years. Given a high probability of Paychex revenue to grow at a historic rate in the coming years, Trefis believes that the stock is overvalued. Notably, the stock’s current valuation multiple (P/E) is above pre-pandemic levels. We highlight quarterly revenue, earnings, stock price and expectation trends for the third quarter of fiscal 2022 in an interactive dashboard analysis, Overview of Paychex Earnings.

Long-term trends and operational measures

Paychex’s two operating segments, Management Solutions and Professional Employer Organization, contribute 75% and 25% of total revenue, respectively. The 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). The company’s revenue grew at a CAGR of 6.5%, from $2.9 billion in fiscal 2016 to $4 billion in fiscal 2021. Notably, the growth rate of the PEO segment was much stronger at 10% per year compared to Management Solutions’ 3% per year over the past five years. The company’s total customer base increased by 17%, from 605,000 in fiscal year 2017 to 710,000 in fiscal year 2021. Additionally, the company reaches approximately 8.8% of the total of 8 million employing companies in the United States.

Labor market trends

In March 2022, the Bureau of Labor Statistics (BLS) reported that 678,000 jobs were added in February and the unemployment rate fell to 3.8%. While employment in professional and business services, retail trade, transportation and warehousing has recovered to considerable levels, employment in leisure and hospitality is down 9% since February 2020. L he leisure and hospitality industry recorded 7.7 million job losses, or 38% of the total job loss during the peak of the pandemic in April 2020. (related: Is Paycom Stock a good choice for making long-term gains?)

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Return March 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
Return PAYX 6% -8% 107%
S&P 500 return 1% -7% 98%
Performance of the Trefis MS portfolio 2% -9% 259%

[1] Cumulative monthly and cumulative annual as of 03/28/2022
[2] Cumulative total returns since the end of 2016

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