Shares of Paychex Tumble on Bank of America Downgrade

Shares of Paychex were falling on Wednesday after the company received a downgrade from Bank of America which blamed “excessive valuation” and “underwhelming fundamentals.”

The stock fell 3.57% after the bank cut its rating on the employment services company from “neutral” to “underperform.”

Bank of America research analyst Jason Kupferberg said that the has already returned 26% this year so far, but “this outperformance has been driven almost exclusively by multiple appreciation.”

“We believe the higher multiple is in part a result of the falling 10-year yield, rather than improving fundamentals, and as a result, we view the multiple re-rating as lower quality and less sustainable…on the basis of underlying fundamentals, we view shares are overvalued,” said Kupferberg.

According to the bank, lower interest rates would also pose a threat to the company. “Lower bond yields tend to make high dividend yielding stocks … more attractive. But ironically, lower rates negatively impact float income for Paychex. We estimate a 25 bps cut in the Fed Funds rate would represent about a $0.01 annualized EPS headwind,” said Bank of America.

It was also on Wednesday that Paychex reported its fourth quarter financial results which revealed a revenue beat but a lowered outlook. During the earnings call, CEO Martin Mucci remarked, “America’s businesses are operating in challenging times. The unemployment rate is at its lowest in nearly 50 years, while employers try to ramp up their hiring. As a result, there is a lack of talent to fill open jobs, and the regulatory environment is complicated and continuously changing. State jurisdictions are continuing to advance employment-related laws and regulations that impact the hiring and employment of workers. Also, the way people work is changing, requiring employers to understand employees’ workplace expectations, challenges and requirements.”

He added, “In this evolving landscape, businesses are looking for simple solutions that help them build their business, stay compliant, improve productivity and recruit, hire and retain talent. Paychex is uniquely positioned to meet these needs through our breadth of service offerings, but more importantly, through the combination of our innovative technology and personalized service model. This sets us apart and allows us to be true partners and advocates for our clients.”

Bank of America has still kept its 12-month price target of $82 on Paychex shares.

Disclaimer: We have no position in Paychex, Inc. (NASDAQ: PAYX) and have not been compensated for this article.