Paychex stock price

Buy the Dip in Paychex, Inc. for a Pay Check at Retirement

Paychex stock price

Paychex, Inc.’s (NASDAQ: PAYX) stock price is falling into a buying opportunity that retirement-oriented income investors should heed. The only trouble with the Q3 results and guidance is that they failed to exceed expectations, and the stock valuation was high. Trading at roughly 25X earnings, the company needed to sustain outperformance and issued better-than-expected guidance to keep the share price higher today. The takeaway is that the stock price for this well-positioned, high-yielding business-services company with a fortress balance sheet has returned to trend and is setting up a great entry point. 

Paychex Has a Solid Quarter and Widens Margin

Paychex had a solid quarter despite the $1.44 billion in revenue falling short of consensus. The growth is driven by strength in both core operating segments offset by the wind-down of services related to COVID-related employee tax credits. That wind-down shaved three hundred basis points off of the top line. Management Solutions, the primary segment, which includes the closed business, grew by 2%, while PEO services grew by 8%. PEO includes payroll and insurance services and is bolstered by a 25% increase in interest income on funds held for clients. 

Margin is an area of strength for Paychex. Cost controls and interest income favorably impacted the margin, leaving operating income, net income, and adjusted earnings above the consensus figures. Operating income grew by 6% and adjusted earnings by 7%, outpacing the topline growth by 170 and 270 basis points, respectively. 

Guidance is a bitter pill for the market but aids shareholder value. The company trimmed its target for revenue growth but maintained its outlook for earnings. Earnings are expected to grow by 10% to 11% for the year, with strength projected for Q4. Because the FOMC is expected to cut rates soon and spark an economic pivot, it is likely that growth will persist into 2025 and may accelerate. Regardless, the business generates sufficient cash flow to maintain its fortress balance sheet while paying dividends, repurchasing shares, and investing in growth. 

Investments are centered on technology, which makes sense for the digitally-oriented business services provider. Efforts include data handling, analysis, and AI, which is being used to aid internal operations and client services. AI applications include machine learning and LLMs.

Paychex Cash Flow, Balance Sheet, and Capital Returns are Attractive

Paychex's cash flow, balance sheet, and capital returns explain why the post-release stock price implosion is such a good opportunity. The company maintains a fortress balance sheet and is net cash, allowing it to invest in the business while sustaining a high-yielding dividend. The nearly 3.0% payout is roughly 75% of the earnings, but this is not an issue due to the net cash position, low leverage, outlook for growth, and cash flow. 

The balance sheet highlights include a cash build, increased assets, and a 7.2% increase in shareholder equity, which suggests that another solid increase will come at the end of the year. As it is, the company has increased its distribution for nine years and runs a high single-digit CAGR. 

Analysts Sentiment is a Drag on Paychex Stock Price

Analyst sentiment drags Paychex's stock price but may change soon. Over the last year, analysts' sentiment fell to Reduce from Hold, while the price target fell. However, the stock is fairly valued at current levels, trading below the consensus target, and may lead them to alter their positions.

Assuming no further reductions come, the market’s move to $113 opens a significant opportunity. It puts the market at critical support with a potential for a mid-single to low-double-digit upside by later this year. In the long term, this stock could move to a new all-time high by the end of next year, supported by steady labor market growth and deepening penetration of services. 

Paychex Stock Chart

Learn more about PAYX

Newest Stories

microsoft logo on smartphone 100 bills in backgroud
6 Reasons the S&P 500 Will Keep Rising This Year

The S&P 500 (NYSEARCA: SPY) index can keep rising this year even if many stocks within it don’t. The reasons are simple and center around the top six holdings. The S&P 500 is a market cap-weighted index, meaning those companies with the highest market cap have the most impact, and wh...

Thomas Hughes | Jun 18, 2024

Cava Group, Inc. logo is displayed on a smartphone screen
CAVA's Per-Restaurant Stock Value Outshines Chipotle's

Markets are now looking more into shares of CAVA Group Inc. (NYSE: CAVA), not because it’s small but because it’s growing. Most seeking consumer discretionary sector opportunities may try to copy one of Wall Street’s sweethearts: Bill Ackman. Through his hedge fund, Pershing Squa...

Gabriel Osorio-Mazilli | Jun 18, 2024

Upstart logo is displayed on a smartphone screen
The Most Shorted Stocks in June: Hold, Short, or Squeeze?

Short interest is high and rising in many stocks, setting them up for a squeeze given the proper catalyst. The catalyst for a squeeze could be as simple as Meme stock mania and result in quick gains for savvy investors. The question is which meme stocks are ripe for squeezing and how likely a sque...

Thomas Hughes | Jun 18, 2024

Stethoscope on a stock chart
Top 2 Small Cap Healthcare Stocks to Buy Before Rate Cuts

Will the market get interest rate cuts at all this year? That is the question that looms over most investors’ shoulders today. However, there aren’t many reasons for the Federal Reserve (the Fed) to consider cutting rates. With sticky inflation and a hotter-than-expected labor market, ...

Gabriel Osorio-Mazilli | Jun 18, 2024

TickerTalk Unveils Real-Time Financial Insights and Breaking News!