We Temper Our Near-Term Outlook for Paychex, but Expect a Rebound From 2024, No Change to FVE

Payroll processors have benefited from robust employment gains during the COVID-19 pandemic recovery. However, while labor markets have proven resilient to date in 2022, we have adjusted our macroeconomic forecasts to factor in a near-term slowdown in economic activity before a recovery from fiscal 2024. We expect aggressive contractionary monetary policy aimed at controlling rampant inflation to curb economic activity and slow hiring activity in the near term. Nonetheless, we expect this contraction to be short lived with a forecast rebound from fiscal 2024 as supply chain shocks fade, and tight monetary policy unwinds. Our updated macroeconomic forecasts are in line with payroll processing peers and are immaterial to our valuation for wide-moat Paychex. At current prices, shares are trading in line with our unchanged $115 fair value estimate.