24/7 Wall St.

This weekend there was a positive report out of Barron’s on Paychex Inc. (NASDAQ:PAYX) that has shares up almost 2% pre-market, although the timing of this is odd considering the part of the economic cycle we are in. Barron’s notes that the recent pullback to around $41 looks like a classic buying opportunity as shares could recover to $46 within a year and $50 in eighteen months.

Barron’s specifically noted, "Though the numbers were generally in line with or above company guidance, with sales up 10% at $507 million and earnings of 40 cents a share, they fell short of many analysts’ more ambitious projections. Investors also worried over the company’s slightly lowered expectations for the full year, with profit growth now set at about 13% versus 15% three months earlier." You can read through the whole article yourself to see if you believe the company on a "because of the FOMC rate cut and because of the stock buybacks" as the excuse that is being used for lower guidance. 

Shares closed at $42.02 on Friday and the 52-week range is $36.08 to $47.14.  If you go back to summer of 2006, this was the real opportunity, as shares fell off and traded under $35 for a brief period of time.  In the year that followed this the shares ran more than 35% before the recent giveback.

The good news here is that shares didn’t really fall off more than they did on the warning.  But at this point in the business cycle it seems that the risk is perhaps more than the rewards for a stock that has become arguably range-bound.  Analysts on average appear to have a $47.50 to $48 price target, the market cap is $15.75 Billion, and it trades at 26.25-times forward fiscal May-2008 earnings projections.

There isn’t really anything wrong with Paychex as a business, but this is less than a 10% projected upside for the next year and that isn’t really a solid projected return for what is arguably still deemed by many as a growth stock.  If growth and income investors are looking for oversold opportunities, there are many other stocks out there.

Jon C. Ogg
October 8, 2007