Throughout 2018, the United States imposed tariffs on foreign products. Economic data, including the Small Business Optimism Index, surged, though correlation may not be causation. The majority of companies surveyed reported that they were trying to hire, the prevailing issue cited was a lack of qualified workers.
Having then taken a cursory look at Paychex (PAYX), which provides human resources, benefit, and payroll outsourcing to small and medium businesses, an opportunity was there for it but the
company’s execution was not as impressive as it could have been. Also, it seemed that the advent of an economic downturn could be problematic in different ways. Despite the stock’s dividend, cybersecurity (there are electronic funds, CIBR) probably had better prospects; though PAYX did well in 2019.
With a recent outbreak of the Covid-19 illness, as persons avoid travel industries; and perhaps retail stores and restaurants, and shopping malls that are already struggling; employment data and hiring plans probably will both be in freefall. Though it is not yet clear what is realistic or maybe exaggerated, if there are business failings and job losses, there would be effects that work their way through the economy in the future.
Though it is not an official definition, a recession is associated with two consecutive quarters, or six months’ decline in economic output. A depression is worse, sometimes identified as multiple years of recession. Online opinions of our situation vary, but they are overwhelmingly negative, and there are forecasts of an economic depression.
Small and mid-size companies, such as those that need to outsource key functions, could be hardest hit. Help is being arranged by the federal government. Most recent news describes a broadly-supported $350 billion in aid to small businesses, with incentive for its use on payrolls.
Paychex should have problems. Its stock has been dropping faster than the rest of the market. It is off some 38%, with the rest of the S&P 500 having done 13.5% better so far in 2020:
Judging by the chart, it appears late to capitalize on the stock’s decline. Still, it is really in the middle of a potentially catastrophic situation for its customers. Actually, with no apparent remedy to the pandemic, it could also make sense to bet against the entire market upon any bounce, by means of SH or something similar, while owning a few choice stocks or securities.
Going against PAYX:
Meanwhile, it cannot earn as high a rate on whatever funds remain held for clients. It is not clear how immediate or extensive the cumulative problems will be. A better opportunity would have been to bet against PAYX a month ago, though the stock could have further to decline. If aid is in fact approved for small businesses, the stock could move higher.
The author may invest in SH, sell short shares of PAYX, or most likely, buy an in the money put option(s) that would profit if the price of PAYX declines, preferably after the share price rises.
3/30/20 At $64.42, the stock is well off the level depicted above as the US Government has followed through with what is described as a stabilization, aid or rescue fund–not necessarily a stimulus. It is not clear how high the share price might go, it could maybe outperform the S&P 500, and actually be better to be a shareholder. In keeping with the issues described above, however, if you are going to sell something, it may be better to get as high a price as possible. As an interested observer, above $70 anytime soon would be surprising but can’t be ruled out by any means.
Having then taken a cursory look at Paychex (PAYX), which provides human resources, benefit, and payroll outsourcing to small and medium businesses, an opportunity was there for it but the
With a recent outbreak of the Covid-19 illness, as persons avoid travel industries; and perhaps retail stores and restaurants, and shopping malls that are already struggling; employment data and hiring plans probably will both be in freefall. Though it is not yet clear what is realistic or maybe exaggerated, if there are business failings and job losses, there would be effects that work their way through the economy in the future.
Though it is not an official definition, a recession is associated with two consecutive quarters, or six months’ decline in economic output. A depression is worse, sometimes identified as multiple years of recession. Online opinions of our situation vary, but they are overwhelmingly negative, and there are forecasts of an economic depression.
Small and mid-size companies, such as those that need to outsource key functions, could be hardest hit. Help is being arranged by the federal government. Most recent news describes a broadly-supported $350 billion in aid to small businesses, with incentive for its use on payrolls.
Paychex should have problems. Its stock has been dropping faster than the rest of the market. It is off some 38%, with the rest of the S&P 500 having done 13.5% better so far in 2020:
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| Pink, Biotechnology (IBB); Purple, Healthcare (IHF), Thin blue, Paychex; Blue, S&P 500 |
Judging by the chart, it appears late to capitalize on the stock’s decline. Still, it is really in the middle of a potentially catastrophic situation for its customers. Actually, with no apparent remedy to the pandemic, it could also make sense to bet against the entire market upon any bounce, by means of SH or something similar, while owning a few choice stocks or securities.
Going against PAYX:
- Credit risk exposure in connection with purchase of accounts receivable as a means of providing payroll funding to clients in the temporary staffing industry.
- Within Professional Employer Organization “PEO” business, maintains health and workers’ compensation insurance covering worksite employees. The insurance costs are impacted by claims and are a significant portion of PEO costs. If experiences a sudden or unexpected increase in claims activity, costs could increase. In addition, in the event of expiration or cancellation of existing contracts, may not be able to secure replacement contracts on competitive terms.
- Debt-financed, $1.2 billion acquisition of Oasis, which had bought other companies, was the largest acquisition in its history and doubled the number of worksite employees served in PEO…now progresses with full sales rep headcount.
- In December, 2019, interest on funds held for clients anticipated to grow approximately 4%, modified from a range of 4% to 8% at start of the year, and simply reflected the most recent federal funds rate cuts. Rate cut to near zero this month.
- As part of the payroll processing service, authorized by clients to transfer money from their accounts to fund amounts owed to their employees and various taxing authorities. Could be held liable for such amounts in the event the client has insufficient funds to cover them. Has in the past, and may in the future, make payments on clients’ behalf for which it may not be reimbursed, resulting in loss to it.
- When there is a slowdown in the economy, employment levels and interest rates may decrease or become more volatile. These conditions may impact its business due to lower transaction volumes or an increase in the number of clients going out of business. Current or potential clients may decide to reduce their spending on payroll and other outsourcing services. In addition, new business formation may be affected by an inability to obtain credit.
- The interest earned on funds held for clients may decrease as a result of a decline in funds available to invest and lower interest rates (above). In addition, during periods of volatility in the credit markets, certain types of investments may not be available or may become too risky to invest in, further reducing the interest it may earn on client funds.
- Tariffs and the trade issues impact roughly 25% to a third of small businesses, per the CEO.
- It recently repurchased 2 million shares for $171.9 million, or $84.95 each. This may well be a background political topic.
- PAYX consensus earnings estimates are the same as they were 90 days ago.
- Claims a “Strong liquidity position.” Part of its balance sheet strength is funds held for clients, which earn interest. It most recently reported $710 million of its own cash or equivalents, which it invests in (municipal) government bonds.
- Its quick or current ratio was healthy, about $1,893 / $1,127 = 1.68. It also has credit facilities, of $1 billion at 4.99% and $500 million at 3.15%, with JPMorgan; and a 2.99% $150 million credit facility with PNC Bank that had $51.3 million outstanding.
- Though not seasonal, this is a better time of the year for it. During third fiscal quarter, which ends in February, the number of new payroll clients, new retirement services clients, and new worksite employees tends to be higher than during the rest of the fiscal year, primarily because new clients prefer to start using services at the beginning of a calendar year. In addition, calendar year-end transaction processing and client funds activity are traditionally higher during third fiscal quarter due to clients paying year-end bonuses, clients requesting additional year-end services, and the preparation and delivery of end-of year reporting requirements.
Meanwhile, it cannot earn as high a rate on whatever funds remain held for clients. It is not clear how immediate or extensive the cumulative problems will be. A better opportunity would have been to bet against PAYX a month ago, though the stock could have further to decline. If aid is in fact approved for small businesses, the stock could move higher.
The author may invest in SH, sell short shares of PAYX, or most likely, buy an in the money put option(s) that would profit if the price of PAYX declines, preferably after the share price rises.
3/30/20 At $64.42, the stock is well off the level depicted above as the US Government has followed through with what is described as a stabilization, aid or rescue fund–not necessarily a stimulus. It is not clear how high the share price might go, it could maybe outperform the S&P 500, and actually be better to be a shareholder. In keeping with the issues described above, however, if you are going to sell something, it may be better to get as high a price as possible. As an interested observer, above $70 anytime soon would be surprising but can’t be ruled out by any means.