The Institutions, And Results, Have Paychex Cashing In
Paychex (NASDAQ: PAYX) results are starting to show the leverage we’ve been anticipating for the past few quarters. The company not only managed to keep a large percentage of its pre-COVID clients but it was also able to add on new ones at an above-average pace. That situation helped keep revenue from shrinking much during the height of the pandemic and has it set up for accelerated growth now. The takeaway is that, with more clients than before the pandemic and businesses ramping employment everywhere we look, Paychex is more than well-positioned for the coming year and that can be seen in the guidance.
Martin Mucci, Chairman, and Chief Executive Officer, commented, “We posted strong financial results for the second quarter of fiscal 2022, with growth of 13% in total revenue and 21% in diluted earnings per share. Results were driven by growth in employees within our client base and continued strong sales growth and client retention.
And we are not the only ones to see the potential in this and other labor market stocks. The institutions have been net buyers of this stock for the last 7 consecutive quarters and we don’t see that trend ending. The data from Insidertrades shows the institutions purchased about 3.15% of the market cap in the last 12 months (with shares trading at $137) and 2.8% of that activity occurred during the first quarter of 2022. The takeaway here is that institutional ownership is above 80% and on the rise and compounded by a high 11.5% inside ownership as well. The insiders have been selling over the past few quarters but those sales are small and consistent with share-based compensation packages so not a red flag for us.
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Paychex Cashes In On Tight Labor Markets
The analysts are also in support of the stock and have begun to increase their price targets in the wake of the Q2 results. There has been only a single commentary so far but, based on the history, we think that will change soon. The one new commentary we have doesn’t include a rating but the consensus rating is a firm Hold, the price target, however, was increased to $142 and just shy of the highest on record. That target, $145, assumes about 6.5% of upside for the stock as well as a new all-time high. The consensus price target is lagging the market but trending higher in the 12-month, 3-month, and 1-month comparisons.
Tight labor markets are a problem for many employers but not so much for Paychex. Tight labor markets mean high levels of employment and that means business for the company. The Q2 revenue of $1.09 billion is not only up by nearly 13% from last year but it also beat the consensus estimate by 280 basis points. The revenue was driven by a 14% increase in Management Solutions and an 11% increase in PEO and both helped to drive margin improvement. The operating margin widened by nearly 400 basis points to drive a 24% increase in operating income. On the bottom line, the $0.91 in GAAP earnings beat by $0.11 and the guidance is just as good.
Looking forward, the company is expecting full-year revenue and earnings in a range well above the previously stated range and the consensus estimate. Based on our take on the labor market and employment situation, there is upside risk in the numbers too.
The Technical Outlook: Paychex Is Melting Up
Price action in Paychex corrected earlier this year but that movement is over. The stock is now melting up on outperformance and outlook with a chance of setting new highs. The daily charts are bullish enough but, when you zoom out to the weekly charts, it looks like we have a strong uptrend and consolidation in play. Assuming the market does break out to new highs, we see this stock trending higher into the end of the year and possibly for the next two years on growing business, institutional buying, and analyst support.
Companies in This Article:
| Company | Current Price | Price Change | Dividend Yield | P/E Ratio | Consensus Rating | Consensus Price Target |
|---|
| Paychex (PAYX) | $141.39 | +1.5% | 2.77% | 30.15 | Reduce | $132.23 |
Experience
Thomas Hughes has been a contributing writer for InsiderTrades.com since 2019.
Areas of Expertise
Technical analysis, the S&P 500; retail, consumer, consumer staples, dividends, high-yield, small caps, technology, economic data, oil, cryptocurrencies
Education
Associate of Arts in Culinary Technology
Past Experience
Market watcher, trader and investor for numerous websites. Founded Passive Market Intelligence LLC to provide market research insights.
