Recessionary Environment To Inhibit Further Gains In Paychex Stock

We believe there may be better places for your money than Paychex stock (NASDAQ: PAYX) at the present time. After gaining 11% this year, PAYX currently trades at $94 – slightly above the pre-Covid high of $90 in February. Supported by a high customer retention rate during the pandemic, PAYX stock has regained the level observed before the pandemic and we believe that the stock has little room for growth in the near future. Also, the company’s fundamentals are likely to be marred by ongoing austerity measures and cutbacks on new recruitments across in the near-term. Our interactive dashboard analysis highlights Paychex’s stock performance during the current crisis with that during the 2008 recession.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • From 3/24/2020: S&P 500 recovers 66% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how PAYX and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

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  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

Paychex vs S&P 500 Performance Over 2007-08 Financial Crisis

PAYX stock declined from levels of around $41 in September 2007 (pre-crisis peak) to levels of around $22 in March 2009 (as the markets bottomed out), implying PAYX stock lost 46% from its approximate pre-crisis peak. It recovered post the 2008 crisis to levels of about $30 in early 2010 – rising by 39% between March 2009 and January 2010. In comparison, the S&P 500 Index first fell 51% in the wake of the recession before recovering 48% by January 2010.

Paychex’s Fundamentals in Recent Years Look Strong

Paychex’s Revenues have observed a strong 37% growth from $2.9 billion in 2016 to $4 billion in 2020, primarily led by higher payroll clients and interest income on client funds. Along with revenues, the company’s margins also expanded from 25.6% to 27.1%, resulting in a 45% EPS growth from $2.10 in 2016 to $3.06 in 2020. Moreover, the company’s Q1 2021 (ending in August) revenues were 6% below the level seen a year ago with the EPS figure sliding from $0.74 in Q1 2020 to $0.59 in Q1 2021.

Does Paychex Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

Per recent filings, the company has $800 million of long-term debt and a similar amount of cash on hand. The company also generated $215 million of cash from its operations in Q1 2021, and it appears to be in a good position to weather the crisis given there are no long-term debt maturities until 2026.

CONCLUSION

Phases of Covid-19 crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-November 2020: Weak Q1 results, but continued improvement in demand and progress with vaccine development buoy market sentiment
  • Note: Paychex’s fiscal year ends in May

Going by the historical performance and in view of the strong rally in Paychex’s stock since late March, we believe that the stock has little room for growth in the near future.

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