Why Did Paychex (PAYX) Drop 6% Despite Good Earnings?

Investing

Published: June 26, 2024 5:10 pm

Paychex (PAYX) reported earnings this morning and beat Wall Street analysts’ expectation on both the top and bottom line, while also showing year-over-year growth.

Here are the facts:

Revenue was $1.295 billion vs $1.293 billion estimates.
Revenue grew 5% compared to the same quarter last year
Earnings were $1.12 per share vs $1.10 estimates
Earnings were up 15.4% compared to the same quarter last year

If you’ve invested for a long time, you’ve no doubt seen “slight” earnings beats like this be rewarded with 10%+ stock gains on certain stocks. So why was Paychex not up at all today? And in fact, why did it drop 6%.

One simple word: Expectations.

Paychex’s CEO guided to fiscal 2025 earnings growth of 4% to 5.5% and slightly better earnings-per-share (EPS) 5% – 7%, which seems about in line with the earnings they just reported, but wasn’t enough to excite investors. Today, Paychex gave back all the stock gains it’s earned this year.

In the press release, CEO John Gibson commented on his customers (other companies) seeing continued pressure from regulations, a tight labor market and inflation, perhaps explaining in part why Paychex’s expectations for the future as so middling.

When you invest, you’re buying the future earnings growth of a company, and counting on those earnings eventually being rewarded in the stock price. If your expectations for the future are stunted, you can expect a lower stock price to be reflected, as it was today.

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