Opinions
Brooke Thackray
Paychex
PAYX-Q
WATCH
May 23, 2018
Stock price when the opinion was issued
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Recent earnings were up 4%. Veritable cash cow because they bank all the payroll taxes (that customers submit to the IRS) at current interest rates. It's like free money on top of earnings. Revenue growth was double GDP. Entirely domestic, so protected from trade barriers.
Services small companies, so if the economy does well from tax cuts, this name should continue to grow. Long-term, compounding annual returns of 14-15% -- you double your money roughly every 4-5 years. A buy and hold, not a trade.
Is a domestic US company, so it faces no tariff risk. Is Trump cuts taxes 15%, this adds 20% to growing earnings for PAYX. Margins have been growing, and they just bought a company that will accrete to earnings (they report tomorrow). Trades at a high 28x PE, but the dividend grows 10% annually. Has owned this 30 years.
They reported a mixed quarter: in-line earnings and slightly lower revenue, but the full-year revenue forecast was light, though earnings forecast was fantastic. Made new sense that shares slid 9% today. He likes their merger with Paycore which may have made their quarter harder to understand.
Similar to ADP who is focused on the small and medium sized companies. When the economy is really strong this company will do well. His concern is that the economy may be at peak capacity, with unemployment less than 4% -- how many more paycheques can they write? This is also outside the seasonal peak for the sector. Technically, it needs to hold key support near these levels.