After 24% Gain By Paychex, BofA Steps To The Sidelines

Now that shares of Paychex, Inc. PAYX have gained 24 percent in the past five months, one Wall Street firm is dropping its bullish thesis. 

The Analyst

Bank of America Merrill Lynch's Jason Kupferberg downgraded Paychex's stock rating from Buy to Neutral with an unchanged $73 price target.

The Thesis

No near-term catalyst exists to boost Paychex shares higher to boost shares, Kupferberg said in a Tuesday note. (See the analyst's track record here.) 

"While we don't detect any discernible deterioration in fundamentals, we don't anticipate material upside to estimates either, outside of tax reform benefits." 

Investors assuming that the recent tax legislation is a catalyst are likely mistaken, as the stock's valuation multiple "largely captured these benefits," as the company plans to spend up to 50 percent of the savings, Kupferberg said. Some of the tax credits the company previously took advantage of will no longer apply under the new tax code, he said. 

Core payroll isn't as big a part of Paychex's business as it once was, yet it still accounts for 54 percent of total revenue, the analyst said. The segment nonetheless remains the "most important metric" for the stock, and it was "mildly disappointing" when management guided this metric to increase closer to the low end of the 1-2 percent range for fiscal 2018, Kupferberg said. This implies zero acceleration in the back half of 2018 versus the front half. 

Automatic Data ProcessingADP is preferable over Paychex for two key reasons: it boasts sharper growth acceleration in fiscal 2018 and beyond and is likely to pass "virtually all" of its tax reform savings to shareholders, Kupferberg said. 

Price Action

Shares of Paychex were trading higher by 0.2 percent Tuesday afternoon while shares of ADP were higher by nearly 1 percent.

Related Links:

ADP Vs. Paychex: Bank Of America Changes Its Preference

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