Paychex In A Trump Tax World

Wells Fargo believes Paychex, Inc. PAYX would be a beneficiary of President-elect Donald Trump’s potential lowering of corporate taxes and higher interest rate environment.

Potential Tax Reforms

The potential tax reform would be significant for Paychex, which has a mid-30-percent tax rate. Paychex is also notably more optimistic on its float portfolio after the Fed's rate hike and signal for further calendar year 2017 increases.

“This high-margin revenue for PAYX could be a source of upside in FY17 (and more likely FY18) as PAYX's approach is to assume no further rate increases in its guidance,” analyst Esklesen wrote in a note.

Potential ACA Repeal

That said, the potential repealing of Affordable Care Act and the recently stayed Department of Labor overtime rules could impact growth. Paychex expects potential repeal of the ACA (assuming spring 2017 start and two- to three-year phase-in) could reduce revenue/EPS by about 1–1.5 percent per year.

Also, the CEO said the improved client optimism has yet to translate to client action as most await more concrete action.

Analyst Commentary

Meanwhile, Wells Fargo maintains its Market Perform rating on the stock due to the strong post-election rally.

“While we acknowledge that PAYX could be a beneficiary of potential Trump-related changes, specific policy changes are yet to be determined and the stock has already reacted strongly post-election (up 14 percent vs. the S&P 500 up 6 percent),” Esklesen added.

On Wednesday, Paychex reported second-quarter EPS in line with consensus, but revenue fell short of Street view.

The analyst has raised the valuation range on shares of Paychex to $60–$62 from $56–$58.