On Tuesday, Evercore ISI adjusted its outlook on Paychex (NASDAQ:PAYX), reducing the stock price target from $118.00 to $116.00 while maintaining an In Line rating. The revision follows Paychex's third-quarter fiscal year 2024 earnings, where the company posted an adjusted diluted earnings per share (EPS) of $1.38.
This figure slightly surpassed the consensus estimates of $1.37 and Evercore ISI's own forecast of $1.36. The beat was attributed to disciplined operating expenses and favorable below-the-line items, which offset slower revenue in both Management Solutions and PEO services.
The report highlighted a broad-based slowdown in revenue growth, linked to moderating employment and wage growth among small businesses (SMBs). The tightening labor market is causing SMBs to face difficulties in finding qualified workers, coupled with challenges due to limited access to affordable growth capital and inflationary pressures.
As a result, Paychex's management has revised its fiscal year 2024 guidance for Management Solutions revenue growth from the previous range of 5-6% to a new range of 3.5%-4.0%, falling below the consensus estimate of 5%.
Despite the solid performance of Paychex's PEO business, the challenging hiring environment for SMBs has led Evercore ISI to anticipate that the fiscal year 2024 PEO revenue growth will likely be at the lower end of the 7-9% projected range. In light of these factors, Evercore ISI has also adjusted its forecast for Paychex's adjusted EPS, reducing the estimate for fiscal year 2024 from $4.72 to $4.65 and for fiscal year 2025 from $4.95 to $4.85.
The lowered price target of $116.00 is based on a multiple of 24 times the projected fiscal year 2025 adjusted EPS, a decrease from the previous multiple of 25 times. This adjustment reflects the expectation of a continued moderating hiring environment which directly impacts Paychex's core customer base of SMBs. Despite the reduction in the price target, Evercore ISI has chosen to reiterate its In Line rating for the stock.
InvestingPro Insights
With Evercore ISI's recent price target adjustment for Paychex (NASDAQ:PAYX), investors may be seeking additional context on the company's financial health and market position. According to real-time data from InvestingPro, Paychex boasts a market capitalization of $43.27 billion and maintains a relatively high P/E ratio of 26.86.
This valuation reflects a company that is perceived as having substantial earnings potential, though it is trading at a premium relative to near-term earnings growth with a PEG ratio of 2.42. Nonetheless, Paychex's strong gross profit margin of 71.54% over the last twelve months indicates efficient operations and the ability to maintain profitability.
InvestingPro Tips highlight Paychex's financial prudence, as it holds more cash than debt on its balance sheet, which can be a reassuring sign for investors concerned about financial stability.
Furthermore, the company's impressive track record of raising its dividend for 10 consecutive years, with dividend payments maintained for an impressive 37 years, speaks to a commitment to returning value to shareholders. For those interested in exploring further, there are additional InvestingPro Tips available that delve into the company's financial nuances and investment potential.
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