Payroll-Services Provider Paychex Beats Earnings Estimates; Analysts Raise Target Price

Payroll-services provider Paychex reported better-than-expected earnings in the second quarter of fiscal year 2021 and slightly upgraded its outlook, largely reflecting its improving margin discipline.

The provider of payroll, human resources, insurance, and benefits outsourcing for small and mid-sized businesses said its earnings totalled $272.4 million, or $0.75 per share in the three months ended November 30, up from $258.7 million, or $0.72 per share seen in the same period a year earlier.

Excluding items, Paychex reported adjusted earnings of $264.8 million or $0.73 per share for the period, beating the Wall Street consensus estimate of $0.66 per share. The company’s revenue dipped 0.7% year-over-year to $983.7 million.

“Paychex’s fiscal second-quarter results showed the company holding up fairly well in the current environment, and we think its ability to improve its already ample margins during this period supports our wide moat rating on the firm. We will maintain our $74 per share fair value estimate,” said Brett Horn, senior equity analyst at Morningstar.

“Paychex had taken a one-time charge in the first quarter aimed at efforts to accelerate cost reductions, and that effort, along with the stabilization in revenue, appears to have had a material positive impact. While the cost reductions are likely one-time in nature, we think the margin result reflects well on management and speaks to the resilience of the wide-moat franchise.”

Paychex shares closed 2.31% lower at $94.40 on Wednesday. However, the stock is up over 10% so far this year.

Paychex Stock Price Forecast

Twelve analysts who offered stock ratings for Paychex in the last three months forecast the average price in 12 months at $90.83 with a high forecast of $105.00 and a low forecast of $76.00. The average price target represents a -3.78% decrease from the last price of $94.40. From those 12 equity analysts, four rated “Buy”, seven rated “Hold” and one rated “Sell”, according to Tipranks.

Morgan Stanley gave a base target price of $91 with a high of $112 under a bull scenario and $69 under the worst-case scenario. The firm currently has an “Equal-weight” rating on the payroll provider’s stock.

“We are also raising our price target to $91 from $76, given Paychex’s strong performance versus expectations the last couple of quarters, plus greater investor willingness to value the shares at the higher end (PT-implied P/E multiple of 27x on CY22 EPS) of its typical mid-20s P/E range given a more certain path out of the pandemic and into a robust environment for HCM platforms,” said Steven Wald, equity analyst at Morgan Stanley.

Several other analysts have also recently commented on the stock. Cowen and Company raised the stock price forecast to $96 from $78. Jefferies upped the target price to $95 from $85. Evercore ISI increased their price objective to $78 from $75. Credit Suisse raised the target price to $110 from $95. JP Morgan upped the target price to $90 from $83. Wedbush increased their target price to $105 from $80.

Analyst Comments

“Paychex (PAYX) continues to manage costs effectively and has benefitted from conditions remaining more benign than many feared. While investor confidence is justifiably growing, the near-term road map is still uncertain and execution risk will remain elevated for some time,” Morgan Stanley’s Jonas added.

“Paychex (PAYX) is a SMID-focused payroll/HCM platform with an increased focus on full-scale HR outsourcing through its growing PEO/Insurance business (both organically and through acquisitions). We see a balanced risk/reward for the shares that currently considers both 1) its push into the solid growth PEO market and a more recent focus on margin expansion and 2) its exposure to the relatively more vulnerable SMB segment and the increasingly difficult competitive environment for SMID HCM providers.”

Upside and Downside Risks

Risks to Upside: 1) More resilient economic and job growth, 2) The company maintains its record-level retention rates 3) Delivery of notable positive operating leverage and 4) A more profitable interest rate environment – highlighted by Morgan Stanley.

Risks to Downside: 1) Sustained economic pressure on clients, 2) A faster than expected pickup in HCM competition from peers, and 3) An inability to offset top-line headwinds with expense discipline.

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