Goldman Cuts Paychex To Neutral, Sees Less Payroll Upside

In a report published Thursday, Goldman Sachs analyst S.K. Prasad Borra downgraded the rating on

from Buy to Neutral, while reducing the price target from $55 to $52. The analyst believes that the positive impact of improving employment data points has most played out. The unemployment rate had dropped from 6.7 percent at the end of 2013 to 5.3 percent in June 15. This improvement drove growth for payroll services, such as those offered by Paychex. However, job growth has slowed in the past few months, leading the analyst to believe that there is limited potential for positive surprises in payroll revenue growth. "We believe PAYX's increased emphasis on higher value client at the cost of client growth (2016-18 guidance of 1-3 percent) could limit revenue acceleration in the near term," analyst Borra stated, while lowering the EPS estimate for the company by 1-3 percent. The analyst also believes that payroll vendors could benefit from a potential rise in interest rates, benefiting the float income of these vendors. However, the pace of increase of interest rates is like to be slower in 2015 and 2016, which would lead to slower float income recovery. According to the Goldman Sachs report, "If interest rates increase, investors who have owned payroll stocks for their high dividend yields may explore other high yielding fixed income securities or better dividend growth stocks."