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Paychex stock slips on weak outlook for FY2023

Paychex, Inc. Shares (NASDAQ: PAYX) fell 4.2% on Wednesday even as the company reported upbeat results for the fourth quarter of fiscal 2022 (ended May 31, 2022). The stock price drop appears to reflect market resentment over the company’s weak projections for fiscal year 2023 (ending in May 2023).

It’s worth mentioning here that the adjusted earnings of this $41.5 billion provider of human capital management (HCM) solutions exceeded the consensus estimate by 1.3% in the fourth quarter. Meanwhile, its sales surprise in the quarter was 2.7%.

Quarterly Highlights

During the quarter, Paychex adjusted earnings were $0.81 per share, above the consensus estimate of $0.80 per share. Additionally, net income was up 13% from the $0.72 per share total a year ago, driven by higher revenue. High costs and expenses played a spoilsport during the quarter.

Revenue for the quarter was $1.14 billion, up from the consensus estimate of $1.11 billion. On an annual basis, revenue increased 11% driven by an 11% increase in service revenue and a 2% increase in interest on funds held for clients.

The company’s services revenue in the quarter was $1.13 billion, including management solutions sales of $0.85 billion and insurance and professional organization solutions sales. (PEO) of $0.28 billion.

Cost of services revenue increased 14% year-over-year to $360 million, while selling, general and administrative expenses increased 9% to $390, $3 million. Adjusted operating profit for the quarter was $394 million, up 11% year-over-year.

Annual Highlights

During the year, Paychex’s revenue was $4.61 billion, up 14% from the prior year. Adjusted earnings were $3.77 per share for the year, reflecting a 24% increase from $3.04 per share a year ago.

At year-end, the company’s cash and cash equivalents were $370 million, down 62.8% from a year earlier. Long-term debt remained virtually unchanged at $797.7 million.

Net cash flow from operating activities during the year increased 19.5% year over year to $1,505.5 million. The company’s expenditure on property, plant and equipment totaled $132.6 million, up 15.7% from the previous year.

Screenings

For fiscal year 2023 (ending May 2023), Paychex expects revenue to grow 7% to 8% year-over-year. This projection is lower than revenue growth of 14% in fiscal year 2022.

The company expects sales of management solutions to grow 5% to 7%, and sales of PEO and insurance solutions to grow 8% to 10%. Interest on funds held for clients is expected to be between $85 million and $95 million.

Additionally, the company expects adjusted earnings per share to grow in the 9% to 10% range over the course of the year. This figure is lower than the 24% growth recorded in fiscal year 2022.

Official comments

Paychex Chairman and CEO Martin Mucci said, “…we are providing employers with the digital tools and HR expertise to hire, engage, train and retain top talent in this challenging environment.

“Our goal remains to help small and medium-sized businesses succeed, and we believe we are well positioned to continue to fulfill this mission in the next fiscal year,” added Mucci.

Capital deployment

In fiscal 2022, Paychex used $999.6 million (up 10% year-over-year) for dividend payments and $145.2 million (down 6.7%) to redeem 1.2 million shares.

Stock Valuation

According to TipRanks, Paychex has a Consensus Hold rating based on one Buy and eight Holds. PAYX’s average price prediction of $130.56 suggests an upside potential of 13.68% from the current level. Over the past year, PAYX shares have risen 7%.

Bank of America’s Jason Kupferberg maintained a neutral rating on PAYX on Wednesday while lowering the price target to $124 (7.97% upside potential) from $138.

Risk analysis

According to TipRanks, Paychex’s two main risk categories are legal and regulatory and production. While the legal and regulatory risk category adds five risks to the total of 20 risks identified for the stock, the production risk category has four risks.

Conclusion

Paychex benefited from service revenue growth in the fourth quarter of fiscal 2022. However, high costs and expenses could raise concerns in the coming quarters. The company’s projections point to a slow pace of growth in fiscal 2023.

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