Economy, jobs behind Paycheck, ADP downgrades
SAN FRANCISCO (MarketWatch) --
Analyst Gary Bisbee cut his rating on Paychex (PAYX) to underweight, or the equivalent of sell, from equal weight or neutral, and also lowered his rating on ADP (ADP) to equal weight from overweight. He wrote in a research note that while both companies have strong, long-term potential, "growth is likely to remain subdued for 18 to 24 months due to low interest rates and weak employment recovery." Bisbee also said the shares of both companies currently trade "at a substantial valuation premium."
Paychex shares slipped by 51 cents at $31.72, while ADP was off by 78 cents to trade at $53.91 a share following the downgrades. Both stocks have flexed their muscles in June, with Paychex rising 12% and ADP's stock up by about 7% for the month.
With regards to Paychex, Bisbee said that its "growth outlook remains fairly weak, and would need a much stronger U.S. employment recovery and rising interest rates" to drive growth at a substantial level.
But as the Barclays analyst estimated, Paychex gets about 99% of its revenue from the U.S. government, and therefore "we do not expect significant growth reacceleration until the economy is much stronger and interest rates are rising, which seems unlikely in the next year."
ADP faces many of the same issues that Paychex is dealing with, but is in a slightly better position, Bisbee said, partly because "[it] has been far more aggressive than Paychex in the last five years in investing in product development and product-line expansions."
He added that he expects ADP's earnings to grow in the middle to high single-digit levels for the next year and a half, and not reach consistent double-digit growth "until the economy is growing more rapidly and interest rates are rising."