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Paychex Inc

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Morningstar Rating for Stocks Fair Value Economic Moat Capital Allocation

Paychex Continues to Capture Upside From the Economic Recovery, but Shares Screen as Overvalued

We have marginally upgraded our fiscal 2022 forecasts for wide-moat Paychex as we were too pessimistic about the COVID-19 omicron variant’s potential impact on the small business and labor markets. We now expect fiscal 2022 adjusted diluted earnings per share to increase 23% over the prior year to $3.74, up from our previous forecast of $3.60 and in line with updated guidance. As tailwinds from the labor market recovery fade into fiscal 2023, we continue to expect revenue growth to revert to high-single digits underpinned by mid-single-digit industry growth, modest market share gains, low-single-digit price growth, and taking greater share of client's wallet. Our upgraded near-term forecasts are immaterial to our valuation, and we maintain our $110 fair value estimate. At current prices, Paychex screens as overvalued trading at a 25% premium to our valuation. We suspect the market may be extrapolating recent robust top line growth and margin expansion, relative to our view of conditions normalizing from 2023.

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