Analyst: Investor's Negative Reaction To Paychex Guidance May Be Overdone

Paychex, Inc. PAYX reported its fiscal third quarter earnings report Monday which included a revenue beat and in-line earnings but the company's full year guidance may have disappointed some investors -- "unnecessarily" so, according to Stifel.

The Analyst

Stifel's David Grossman maintains a Hold rating on Paychex's stock with a price target lowered from $68 to $66.

The Thesis

Paychex's management guided fiscal 2019 revenue to be in-line with the Street's estimates but guided its EPS to $2.75, which was short of the $2.84 per share expected, Grossman said in a research report. The company also guided its operating margins to be 36 percent versus the consensus estimate of 40 percent and the analyst's estimate pegs net income growth at 12 to 13 percent versus the consensus estimate of 15 percent.

The company's outlook also implies Paychex is accelerating investments in the business, which seems "like an obvious choice" as unit growth in the core payroll business has been flattish or even losing market share over the past few quarters, the analyst said. Some of the investments include digital marketing initiatives, internal and external sales additions, investments to improve operating efficiency and IT investments that provide a better user experience.

Before shifting to a bullish stance on Paychex's stock, Grossman would need to "learn more" about the company's initiatives as they're rolled out.