Never two without three. Following our previous articles in the fall of 2022 and 2023—see here and here —the company founded by Tom Golisano, who now holds only a negligible stake in the capital, returns to the spotlight of our forum.
It is true that, following a sharp rebound in market valuation in 2024, the stock has been on a downward trend since last summer, with two obvious issues likely weighing on the share price.
First, the ambitious $4.2bn acquisition of Paycor, financed by a series of bond issues, which could potentially cause integration problems. These fears were clearly overestimated, especially since the cost of the transaction represents less than two years of operating profit for the new consolidated entity.
Second, and of course, the rapid expansion of AI, which is disrupting a software sector that has long remained an untouchable favorite among investors. Another giant in the sector has itself recently fallen victim to this trend: see Constellation Software & Co: Double alert, triple opportunity?
This situation brings Paychex's share price back to the levels it was at when our previous articles were published. This is not entirely legitimate, since we must now take into account the substantial change in scope—Paycor adds $655m in revenue to Paychex—and since, after adjusting for the exceptional costs associated with the transaction, margins continue to evolve at a historic high.
The results for the first quarter of fiscal year 2026, published yesterday, show very strong growth of 17% compared to the first quarter of last year. Operating profit is stagnating due to integration costs, but adjusted for these costs, it is up 15%.
There was also a notable increase in cash profit, or free cash flow, which reached $647m for the quarter, compared with $533m for the same period last year. On an annualized basis, free cash flow is expected to approach or even exceed $2bn this year, compared to $1.7bn for the last full fiscal year. It should be noted that the company continues to have a surprisingly reasonable stock option compensation policy.
This outlook should be viewed in the context of a market capitalization of $45bn. This is for a group that has firmly established itself as the second largest player in the United States in the field of payroll and outsourced human resources services, behind Automatic Data Processing.
Trading at 15x expected EBITDA over the next 12 months, Paychex, whose profitability remains exceptional in all respects, is certainly trading below what a strategic or financial buyer would pay to acquire it on the private market.
