We've Sold Our Paychex Shares Ahead Of Earnings

Mar. 28, 2016 1:41 PM ETPaychex, Inc. (PAYX)20 Comments

Summary

  • On Wednesday the company will announce its third quarter earnings.
  • We believe the shares are overvalued now and anything short of spectacular will cause a sell-off.
  • We believe the shares could drop as much as 10% if the company fails to deliver.
  • At the right price ($49.00) Paychex is a great investment.

On February 9 when its share price was just $46.66, we saw a good deal of upside for Paychex (NASDAQ:NASDAQ:PAYX). We had a six-month target price of $49.44 and an 18-month target price of $53.52. Well, fast-forward to today and the share price closed at $53.99 before the Easter break. With its third quarter earnings due out on Wednesday we have decided to close our position.

We have been as delighted as anyone to see the shares climb by almost 16% since we bought in. But we are now fearful that anything short of exceptional for its third quarter results will create heavy selling pressure. We have achieved exactly what we set out to achieve and so moving on to a new undervalued company is fine by us. The only opportunity we now see here could be a short opportunity for those brave enough.

Our investment thesis was based around Kauffman Foundation's research which showed that small business activity had been growing in 49 U.S. states. With small to medium-sized businesses being the life-blood of the Paychex business, this was a great catalyst to a strong performance in our opinion. But perhaps not as strong as the market is now expecting.

We believe the company is valued fairly at 24 times earnings. The current share price of $53.99 is indicative of full-year earnings coming in at $2.25 per share. Looking at the analyst consensus estimates we find that only the most bullish analyst currently believes the company can produce earnings per share of that level in fiscal 2017. No one thinks it will get anywhere close to that level in fiscal 2016.

In fiscal 2017 the highest estimate is $2.26 per share and in fiscal 2016 it is $2.06 per share. Of course 24 times earnings is just our preference for what we

This article was written by

Adelphi Venture Capital invests in private and listed companies. Over 30 years in the industry enables insightful equity research that provides alpha for readers.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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