Paychex Analyst Sees Limited Upside Despite Q3 Profitability Surge

RBC Capital Markets analyst Ashish Sabadra on Wednesday reiterated a Sector Perform rating on the shares of Paychex Inc PAYX with a price forecast of $148.00.

The company exceeded earnings estimates for the third quarter, reporting revenue of $1.509 billion, a 4.8% year-over-year increase, closely aligning with analyst expectations. Earnings per share came in at $1.49, surpassing estimates.

While Management Solutions and Funds Held for Clients outperformed projections, Professional Employer Organization (PEO) revenue was slightly below forecasts, said the analyst.

The company credited AI investments, digital transformation efforts, and operational efficiencies for driving a 180-basis-point margin expansion. Management also raised full-year operating margin guidance to 43%, the high end of its prior range, citing ongoing cost optimizations and global efficiency improvements.

Also Read: Dollar Tree To Offload Family Dollar Business For $1 Billion

While Paychex observed slight softness in proposal activity early in the quarter, overall demand remained steady, noted the analyst.

Retention rates improved year-over-year and exceeded pre-pandemic levels, driven by strong customer satisfaction. Client losses declined across all employee size segments, reinforcing business stability.

Paychex now expects over $80 million in cost synergies from its acquisition of PYCR, with the deal anticipated to be accretive to EPS in fiscal 2026.

The company maintained its guidance for interest on Funds Held for Clients, projecting $145 million – $155 million in revenue for fiscal 2025.

PAYX reaffirmed its FY25 revenue growth outlook of 4-5.5% but expects results to land at the lower end due to ongoing challenges in pass-through insurance revenues.

With a ~$150 billion market opportunity, Paychex is well-positioned to expand its footprint in management solutions and PEO services, leveraging strong client retention to maintain or grow its market share.

The company sees potential to increase revenue per client through cross-selling, particularly by offering healthcare solutions to existing ASO clients. With 740,000 payroll and PEO clients, Paychex aims to deepen penetration in HR ancillary services.

Client retention remains near record levels, providing stability in revenue streams. Paychex expects this trend to continue into FY25.

Price Action: PAYX shares traded higher by 0.46% at $150.88 at last check Thursday.

Read Next:

• Exxon Mobil Eyes Semiconductor Boom With 99.999% Pure Isopropyl Alcohol Production Expansion: Details

Image via Shutterstock.