Quick Earnings Preview: PAYX

by Dan September 24, 2012 2:20 pm • Commentary

Event: PAYX: report fiscal Q1 after the close tonight.

-Implied move in the options market is only about 2% vs the 4 qtr & 8 qtr avgs of only about 2%.

-Stock is up about 14% ytd, trailing the SPX by a little less than 2%, but trading within 1% of new 52 week highs.

-Stock is also quickly approaching a level that it has not traded above since Sept 2008.

5 yr PAYX chart from Bloomberg


-Sentiment in the stock is fairly mixed with only 6 Buys, 17 Holds and 5 Sells with an average 12 month price target of about $32.30 (below where the stock is trading).

-Balance sheet fairly solid, with no debt

-While the company’s exposure to the U.S. employment woes would be an obvious investor concern, the stock’s 3.6% dividend yield has clearly buoyed the shares.  This demand by yield investors has pushed the valuation, at least on a simple PE basis to possibly stretched levels at about 22x 2013 earnings on expected growth in the mid to high single digits for the next 2 years.

Volatility: PAYX has historically had cheap options from an implied vol perspective. Even going into earnings the options only trade in the high teens. Meaning any outside moves in an event can be bought fairly cheaply. Below is a graph showing the IV and HV graphed against a yearly average of the IV and HV.

The yellow and pink lines represent the IV360 and HV360 which average in the low 20’s. Monthly IV and HV (red and blue)get as low as mid teens during quiet times, but rarely trade above the 20 mark for extended periods.


MY VIEW: I don’t have any particular insight into PAYX’s business, as stated above, with the sort of earnings growth expected and the obvious sensitivity to U.S. employment, the stock would not be where it is without that Dividend yield.  But with Vol where it is, it is not expensive to take a directional view, and certainly not expensive to hedge stock.  I guess the vol market is telling you that there is no reason to hedge your stock.

With the stock nearing some long term resistance, I would suggest that it would take a meaningful beat and raise print tonight to get the stock through such levels.  Selling the move seems bit silly though, as it is cheap.  SO that leaves me with having to pick a direction, which given my quick look at the story it would likely to be a bit contrarian.  A friend of mine whom with I discussed the name earlier (a very smart options trader at a big institution), who also knows little about the company agreed that the move looks cheap given where the stock is, and the macro backdrop, but it his inclination to stick with what is working in a situation like this.  I couldn’t argue one way or the other, but most of you know I am usually looking down in situations like this.

Looking at trades into the close, will update the post and send out if anything sticks out to me.  As far as today’s activity, there appears to be a buyer of the Oct 35 calls for .40, 3300 have traded so far today, the most active option in all expireys for the stock