Paychex Reports A Robust Fiscal 2022 Result, But Now Faces A Double Edged Macroeconomic Sword

Paychex reaped the benefits of a labor market recovery and strong demand for solutions to attract, manage and retain employees in fiscal 2022. Revenue increased an impressive 14% year over year, supported by strong sales execution, resilient retention, normalizing employment levels, and like for like price increases. Client retention stood at above pre pandemic levels at year end which we attribute to a skew to upmarket clients, and a greater uptake of add on products resulting in higher switching costs. This revenue growth--paired with operating efficiencies and limits on discretionary spending--underpinned a standout operating margin expansion of 310 basis points on the prior year, to 40%. While the result was broadly in line with our expectations, we increase our fair value estimate 5% to $115 due to time value of money. Following a market correction in recent months, shares are now trading in line with our updated fair value estimate.