The company is doing well thanks to an increase in payroll clients and high demand for HR solutions.

Paychex is a company that provides payroll and HR solutions to businesses. The company has seen strong growth in recent quarters, driven by an expanding base of payroll clients and strong demand for HR solutions. Paychex's key operating metrics have also been trending higher, with total worksite employees rising 18% and client retention standing at a strong 88%.

It is possible that the current momentum in the economy could cool off due to increasing economic headwinds. U.S. GDP has contracted in the last two quarters, and the Fed has indicated that it could continue with its path of interest rate hikes. This could put pressure on businesses, which could lead to lower spending.

Looking ahead, Paychex is expected to navigate current headwinds relatively well, given its provision of essential services and tools for businesses to manage payroll, human resources functions, track benefits, and insure employees. For instance, the company's revenues have largely held up through Covid-19 and the Great Recession, exhibiting little cyclicality. However, growth is projected to slow somewhat going forward, with the company guiding sales growth of 7% to 8% for FY'23, down from close to 14% in FY'22. Additionally, Paychex still trades at a relatively high multiple of about 30x consensus 2022 earnings. While this is justified by the company's relatively predictable earnings growth and stable dividend, the high valuation could prove to be a risk for the stock if the economy remains depressed.

We value Paychex stock at around $111 per share, which is 9% below the current market price. However, we believe that the stock is still expensive compared to its fundamentals.

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