Deutsche Bank Upgrading Paychex (PAYX)

Deutsche Bank is upgrading shares of Paychex

to Hold from Sell, to go along with its $25 price target after the shares sold off recently. In a note to clients, Deutsche Bank says, "We upgrade PAYX from Sell to Hold, as we believe our macro/valuation- oriented short call has now mostly played out with the stock settling in around our $25 target over the past couple weeks. PAYX (-18% vs. S&P -6%) has clearly underperformed YTD, as fundamentals have mostly languished amidst lingering effects of this uniquely severe jobs cycle (esp. for small biz) and stubbornly-low interest rates. But we think downside from here is likely limited given support garnered from the 5% divs yield and our belief that most bad news is now priced in. Soft fisc 2011 guidance confirmed our fears that margins could fall for a 3rd straight yr, but now that expectations have been reset, we doubt PAYX materially revises lower its targets for 2011." Deutsche Bank goes on to say, "No near-term catalysts, but downside from here probably limited. Our $25 target is aligned with low end of our normalized earnings analysis, based on our detailed forecast through FY2013E, assuming +5% revs CAGR and EBIT margin (ex-stock comp) of 40%. We ran sensitivity solving for share price, based on EBIT margin assumptions around our forecast, and exit multiples ranging between 17.5-22.5x EPS, 15% premium to ADP, but more conservative than normalized 5yr trading history given late cycle nature of this biz." Shares of Paychex closed at $25.20 yesterday, good for a gain of 23 cents.