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Can Patience Pay for Paychex Investors?
Stock Analysis & Ideas

Can Patience Pay for Paychex Investors?

Shares of integrated human capital management (HCM) solutions provider Paychex (PAYX) have rallied 4.27% since the company released its impressive first-quarter fiscal 2022 (Q1F22) results on September 30. (See Paychex stock chart on TipRanks)

Notably, the company’s client base widened and its suite of solutions witnessed strong adoption during the quarter. A strong balance sheet was a major positive. Moreover, raised guidance for fiscal 2022 revenues, adjusted earnings per share, adjusted operating and EBITDA margins buoyed investor confidence.

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Paychex’s dominant position in the outsourcing market is a perpetual top-line tailwind. Over the years, the company’s sustainable and meaningful growth has been supported by industry-leading service and technology solutions. A strong business model, diversified products and services, and strategic partnerships and acquisitions have driven its growth. Of note, revenues grew at a seven-year (2014-2021) CAGR of 7%.

Paychex appears to be striving to capitalize on the rising opportunities in the professional employer organization (PEO) industry, which is its largest addressable market. A PEO is a company to which small and medium-sized organizations can outsource all their human resource functions.

Significantly, according to Verified Market Research, the PEO market is expected to reach $106.21 billion by 2028, at a CAGR of 10.6% between 2021 and 2028.

The 2017 acquisition of HR Outsourcing was perhaps a step in that direction, expanding Paychex’s services, thereby helping it widen its customer base.

Another remarkable data point in favor of Paychex is its consistent efforts to reward its shareholders through dividends and share repurchases. The company paid dividends of $908.7 million, $889.4 million, and $826.8 million; and repurchased shares worth $155.7 million, $171.9 million, and $56.9 million; in fiscal 2021, 2020, and 2019 respectively. Such initiatives boost investors’ confidence in the company’s prospects. (See Paychex Dividend Date & History on TipRanks)

Nonetheless, Paychex’s rising expenses are attracting investor concerns, as it continues to invest in sales, marketing, product development, and technology innovations, to remain relevant. A major expense for the company is PEO insurance costs, which include employee compensation and health insurance benefits. The company’s acquisition strategy is another major contributor to its costs.

In sum, total expenses for fiscal 2021 were almost $3 billion. Over 5 years (fiscal 2017 to fiscal 2021), total expenses have grown at a CAGR of 9.6%. This is expected to keep Paychex’s bottom line under pressure, going forward.

The Wall Street consensus also remains cautious with a Hold rating, based on 9 Holds and 2 Sells. The average Paychex price target of $116.55 indicates a downside potential of 0.2%.

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.

Disclosure: At the time of publication, Chandrima Sanyal did not have a position in any of the securities mentioned in this article.Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.

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