Stock Watch: What to Look for When Investing in Paychex (PAYX)

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There is a growing demand for effective solutions to manage human resources and maintain organizational payroll. This has become increasingly important in today’s world where business leaders struggle to find and retain talent due to unfavorable labor market conditions and inflationary pressures.

Paychex Inc. (Nasdaq: Backs), is a leading provider of human capital management solutions that is on a mission to simplify the work of HR managers and CEOs. Using advanced technology, it helps businesses hire the right employees and solve complex HR issues.

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In development mode

The New York-based company maintained steady revenue and earnings performance during the pandemic, helped by demand created by widespread digital transformation. The company has improved its market value over the past few years – until the recent market sell-off played spoilsport. In 2022, the stock experienced more volatility, although it reached an all-time high in the middle of the year. But PAYX outperformed the broader market during that period.

Read management/analyst comments on quarterly results

Despite the company reporting positive second-quarter results, the stock fell this week, a sign that the market was still expecting a better result. However, they quickly recovered from the short-term decline and have maintained an upward trend ever since. But that doesn’t make Paychex a reliable investment option because it undervalues ​​the high valuation while generating meaningful shareholder value.

Time to buy?

That said, returning cash to shareholders has been management’s priority — after starting the program a few years ago and raising the dividend almost every year, it has continued to buy back shares. While the stock’s prospects as a long-term investment are still encouraging right now, the best way to access it is to buy when the price drops.

Paychex Q2 2023 Revenue Profile

Continued volatility in the job market and dampened business confidence due to the recession are expected to weigh on Paychex’s finances in the near future, although recent progress on the employment front is encouraging. The continued hiring freeze in some sectors and the increasing incidence of corporate layoffs is not good for the company. Also, companies are estimated to be cautious in their spending, concerned about the central bank’s worsening stance and interest rate hikes.

From Paychex’s Q2 2023 earnings release:

“We posted solid financial results in the second quarter, with 7% growth in total revenue and 9% in diluted earnings per share, driven by our strong execution and comprehensive solutions… We continue to deploy our innovative HR technology and consulting solutions to help employers in this challenging environment. Our We have helped more than 50,000 clients obtain government funding available through the Employee Retention Tax Credit program.

Q2 result

In the second quarter of 2023, Paychex’s revenue rose 7% annually to $1.19 billion, in line with analysts’ forecasts. All three Operating segments recorded growth, which lifted adjusted earnings to $0.99 per share. The bottom line also exceeded expectations. Management expects full-year revenue to grow by around 8%.

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After losing about 12% this year, Paychex shares traded above $115 during Friday’s session. It has been below the 52-week moving average for most of this month.


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