Why Paychex Stock Dropped Today
Key Points
Paychex met on revenue and beat on earnings in Q1.
Paychex grew earnings twice as fast as sales -- but the quality of its earnings is questionable.
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Paychex (NASDAQ: PAYX) stock fell 6.7% through 12:20 p.m. ET Wednesday despite reporting a slight earnings "beat" this morning.
Heading into the company's fiscal Q1 2027 report, analysts expected Paychex to earn $1.32 per share on $1.63 billion in quarterly sales. Paychex nailed the revenue target and beat on profits, earning $1.34 per share.
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Paychex Q1 earnings
Paychex grew its revenue 6% year over year in Q1. Both operating and GAAP net income at the HR, payroll, and benefits company grew twice as fast -- up 14%. (On the other hand, it turns out, the "$1.34" profit was a non-GAAP number. Actual earnings calculated under generally accepted accounting principles (GAAP) were only $1.21 per share.
Also less than optimal: Paychex's free cash flow for the quarter came to just $357.4 million, only 87% of reported net income, and down significantly from one year ago. (So GAAP profits were worse than non-GAAP profits, and FCF was even worse than GAAP. No wonder investors were less than thrilled!)
What's next for Paychex stock
The good news is that despite the Q1 numbers, Paychex is largely sticking with its prior guidance for fiscal 2027. Revenue will probably continue to grow 5% or 6% this year, "adjusted" operating margins will be 44% -- and therefore up materially from the 42% scored in Q1.
Management is still only guiding to 7% to 9% improvement in adjusted earnings per share. But if Paychex improves its profit margins as predicted, it seems likely the company would be able to beat that guidance. Indeed, investors should probably hope Paychex does beat its guidance.
Because paying 23 times earnings for a Paychex growing earnings at less than 10% doesn't sound like a very good deal at all.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
