Why Paychex Stock Popped on Wednesday

Shares of payroll and human resources support company Paychex (NASDAQ: PAYX) rose 4.6% through 11:15 a.m. ET despite it turning in only a mixed earnings report this morning.

Expected to earn $1.48 per share on sales of $1.51 billion, Paychex reported $1.49 per share (adjusted for one-time items) on sales of $1.5 billion, beating narrowly on earnings, and missing even more narrowly on sales.

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Paychex's Q3 earnings

Paychex sales grew 5% year over year in Q3, but adjusted earnings per share grew a better than expected 8%. Earnings as calculated according to generally accepted accounting principles (GAAP), however, grew more slowly than the non-GAAP number, rising only 4% to $1.43 per share.

In a significant development, Paychex noted that the waiting period prior to finalizing its acquisition of "human capital management" company Paycor has expired without objection from the government, meaning this acquisition can now proceed as planned, and will probably close in April.

Is Paychex stock a buy?

Management did not give specific earnings guidance for the coming fiscal Q4. Management did, however, note that its adjusted operating margins increased by 180 basis points to 46.9% in Q3 -- but that this margin will be closer to 43% in Q4. This implies a slip in profitability in the coming quarter that doesn't line up well with the surge in company stock price today.

Still, investors may be encouraged by management's insistence that overall, its earlier "guidance for fiscal 2025 remain unchanged from what we provided previously." So what was this previous guidance? Revisiting the company's fiscal 2024 earnings report issued last June, we learn that Paychex is (still) forecasting:

• 4% to 5.5% earnings growth in 2025 (similar to what we saw in Q3).
• Adjusted earnings growth of 5% to 7% (significantly slower than what we saw in Q3).
• Operating margins of 42% to 43% (slightly below the non-GAAP forecast).

The question for investors now is: Should you pay 30 times earnings for a payroll company growing earnings at only 5%? Personally, I would not do that.

Should you invest $1,000 in Paychex right now?

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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.