Markets

Paychex shares fall after Bank of America downgrades, blaming 'excessive valuation'

Key Points
  • Bank of America slashed its rating for Paychex to underperform from neutral on Wednesday due to its "excessive valuation" and "underwhelming fundamentals."
  • Paychex has returned 26% this year so far, but "this outperformance has been driven almost exclusively by multiple appreciation," says Jason Kupferberg, Bank of America's research analyst.
  • "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," he says.
Paychex Access payroll card in Brookline, Mass.
Pat Greenhouse | The Boston Globe | Getty Images

Shares of Paychex dropped on Wednesday after Bank of America downgraded the stock due to its "excessive valuation" and "underwhelming fundamentals."

The bank slashed its rating for the employment services company to underperform from neutral, while keeping its 12-month price target of $82 unchanged. Shares of Paychex fell 3.57% to about $81.77 on Wednesday following the downgrade.

Paychex has returned nearly 26% this year so far, but "this outperformance has been driven almost exclusively by multiple appreciation," Jason Kupferberg, Bank of America's research analyst said in a note sent to clients during market hours.

"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," Kupferberg said.

The company reported fourth-quarter results on Wednesday, showing an earnings miss and a lowered outlook. Its revenue topped analysts' expectations. The stock was down slightly following the earnings and before the downgrade.

Bank of America also said lower interest rates would 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."