Nasdaq 100 component Paychex, Inc. (PAYX) is trading lower by 1% on Tuesday morning after posting earnings per share (EPS) of $0.61, beating fiscal fourth quarter 2020 profit estimates by a penny. Revenue of $915.1 million also exceeded expectations, but the payroll and human resources provider still reported a 6.7% year-over-year decline due to massive unemployment as a result of the COVID-19 pandemic.

Key Takeaways

  • Paychex, Inc. (PAYX) beat fiscal fourth quarter 2020 profit and revenue estimates but reported a 6.7% year-over-year decline in revenue due to massive pandemic-driven unemployment.
  • The payroll and human resources provider posted mixed 2021 guidance, telling analysts it will take a one-time charge of about $40 million as a result of lower volumes.
  • Shares of PAYX have dropped, and could see a steeper pullback within the long-term uptrend if short-term price action begins to show bearish pressure gaining momentum.

The company posted mixed 2021 guidance, telling analysts it will take a one-time charge of about $40.0 million as a result of lower volumes. Paychex expects Management Solution division revenue to fall between 1% and 4% in the next 12 months, while it forecasts PEO and Insurance Solutions revenue declines of between 2% and 7%. Neither outlook expects a rapid resumption to pre-pandemic income levels, raising a red flag about U.S. employment growth in the second half.

A one-time charge is a charge against a company's earnings that the company's managers say they expect to be an isolated event that is unlikely to occur again.

Wall Street Outlook

Wall Street sat on its hands in the second quarter, issuing few upgrades or downgrades. Five analysts currently rate the stock as a "Hold," while none have issued "Buy" or "Sell" ratings. Hedge funds look more optimistic, with Greenlight Capital and David Einhorn dipping their toe in the water with a 190,000-share long position. Unfortunately, Tuesday's metrics probably won't move the needle with insiders, who remain mixed due to the bearish employment outlook.

Paychex Long-Term Chart (1992 – 2020)

Long-term chart showing the share price performance of Paychex, Inc. (PAYX)
TradingView.com

A 1992 breakout above 1989 resistance at a split-adjusted $1.08 triggered a powerful uptrend that posted an astonishing seven splits into November 2000 top at $61.25. That marked the highest high for the next 16 years, ahead of a steep slide that relinquished two-thirds of the stock's value into the third quarter of 2002. It more than doubled in price into July 2007 and rolled over, testing the 2002 low during the 2008 economic collapse.

The decline found support just eight cents under the 2002 low in March 2009, giving way to a shallow basing pattern that tested the low three times into August 2011. Committed buyers finally returned in 2013, triggering a base breakout that mounted the 2007 high about one year later. Price action then eased into a rising channel that revealed strong institutional sponsorship, finally reaching the 2000 peak in the summer of 2016.

An October 2017 breakout held within the channel until May 2019, when the rally escalated into a vertical trajectory that broke channel resistance before stalling in the upper $80s in June. It mounted that level by two points in February 2020 and turned tail, cutting through the channel into March's four-year low at $47.87. The proportional retracement into the second quarter reversed at new resistance in the mid-$70s, which also marks the 200-day exponential moving average (EMA).

The selloff tested the 2017 breakout successfully, reinforcing support in the low $60s. The stock has also remounted the broken 50-month EMA near $70, placing current action within a neutral eight- to ten-point range that should eventually dictate intermediate price action. Specifically, a breakout into the $80s would favor bulls, while a selloff into the $60s would favor bears. Background indicators looks relatively neutral at this point, offering no obvious edge to either side.

A breakout refers to when the price of an asset moves above a resistance area, or moves below a support area. Breakouts indicate the potential for the price to start trending in the breakout direction. For example, a breakout to the upside from a chart pattern could indicate the price will start trending higher.

Paychex Short-Term Chart (2019 – 2020)

Short-term chart showing the share price performance of Paychex, Inc. (PAYX)
TradingView.com

The bounce off the deep March low reversed just below the .786 Fibonacci selloff retracement level in early June. This harmonic level can stop recovery waves dead in their tracks, so short-term price action should be watched closely for signs that bears are taking control of the tape. This morning's relatively modest downdraft doesn't qualify, but a few downside days could alter the technical outlook, raising the odds for a steeper pullback.

Fibonacci retracement levels are horizontal lines that indicate where support and resistance are likely to occur. They are based on Fibonacci numbers. Each level is associated with a percentage. The percentage is how much of a prior move the price has retraced. The Fibonacci retracement levels are 23.6%, 38.2%, 61.8%, and 78.6%.

The Bottom Line

Paychex posted mixed quarterly earnings and guidance, and has been selling off, continuing a six-week test at the 200-day EMA in the upper $70s.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.