Paychex Upgraded, And 2 Things That Would Further Increase Morgan Stanley's Constructive View

Analysts at Morgan Stanley no longer hold a bearish view of Paychex, Inc. PAYX after the stock's 19 percent year-to-date underperformance compared to the S&P 500's track has created a more "balanced" risk to reward profile.

Morgan Stanley's Danyal Hussain upgrades Paychex's stock rating from Underweight to Equal Weight with an unchanged $55 price target as the stock's premium to the market is now at a 9-year low. Meanwhile, the company's management has acknowledged the elevated pricing pressure from competitors which is factored into the forward-looking guidance. As such, expectations now seem to "adequately capture the stock's downside risks versus its double-digit return profile." The company's growth rate to the PEO business (approximately 11 percent of revenue) has been growing as much as 20 percent in the past few years, which would make it the highest growth rate among its peers.

The company has a stated willingness to pursue an acquisition and could undertake an acquisition that is both accretive and additive to its growth rate.

Related Links: Benzinga's Top Upgrades, Downgrades For August 16, 2017 The Market In 5 Minutes ________ Image Credit: By DanielPenfield (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0) or GFDL (http://www.gnu.org/copyleft/fdl.html)], via Wikimedia Commons

Also, the stock does offer a 3.7 percent dividend yield, potential for stable earnings growth and positive interest rate leverage.

But shares of Paychex could have upside beyond $55 per share for two reasons:

Bottom line, the stock's current valuation premium of 3.8x is the lowest it has been since 2008, which gives the impression there is "little room for further multiple compression" moving forward.