Paychex (NASDAQ: PAYX) shares are up more than 140% from the 2020 lows, but it may be time to ring the register. The Q4 results and outlook are good enough but failed to spark a rally in the stock. The post-release action shows significant resistance at the 150-day moving average suggesting the downtrend will continue.
The caveat is that sell-side support is strong in this stock and may keep the shares from falling much lower. The institutions own about 71% of the company and have been buying it heavily over the past year. The net inflows are nearly double the outflows and ramped in the last 2 quarters. The net activity for the trailing 12 months is worth about 5% of the market cap and coincides with a market bottom.
Paychex Has Solid Quarter And Gets Punished For It
Paychex had a solid FQ4 producing growth and widening margins. The problem is that $1.23 billion in net revenue is only 80 bps better than expected, and the strength didn’t carry through to the bottom line. Given the general conditions, this is reason enough to sell the stock, and the guidance also failed to produce a catalyst. Core business, the service business, increased by 7% and was boosted by a high-double-digit increase in interest income.
Interest income on client funds increased by nearly 70% due to higher interest rates and an increase in overall business. The Management Solutions business grew on a higher client count, more employees per client, and penetration of services, which points to continued growth in F2024.
The margin news is just as mixed as the headline revenue figures. The company widened the margin at the gross and operating levels, but only as expected. This left the Q4 operating margin at 36.9% and the FY margin at 40.6%, up compared to last year. The bad news is that adjusted EPS, up 20% compared to last year, is only as expected compared to the top-line strength. Not exactly bad news, but not news to drive the market higher in the near term.
Guidance is more of the same. The company calls for solid growth in F2024, with revenue up 6% to 7%. The factor weighing share prices is that this range brackets the Marketbeat.com consensus figure neatly, as does the range for earnings. Although not an inspiration for traders now, it is good news that should help support the stock over the long term.
High-Yield Paychex Is A Hold
Paychex is a high-yielding labor-market stock with a dividend worth 3.25%, with shares trading near the bottom of its 2-year range. The payout is a high 75% of earnings, but earnings are relatively unencumbered and growing. The company carries debt but is net cash by roughly $0.8 billion relative to its long-term debt. The takeaway is that the dividend is relatively safe, and the company is committed to rewarding its shareholders, but distribution increases will be small. Paychex has increased its distribution annually for 13 years with a high single-digit CAGR.
That’s enough to keep the analysts Holding the stock. Marketbeat is tracking 13 analysts with an average rating of Hold and a price target of $122.25. That’s about 10% above the current price action but trending lower. If that continues, the price action may be supported at the bottom of the range, but it will have difficulty moving higher.
The Technical Outlook: Paychex Is At A Turning Point
The price action in Paychex suggests the market is at a turning point. The support at the bottom of the range is strong, but the market is having difficulty moving higher. Resistance at the 150-day EMA is equally solid and capping gains. If the market can move above the 150-day EMA, it will trend higher with the range with a possible top near $120. If not, this stock could continue to wallow at current levels with a chance of moving below the range's low end.
