Paychex's Paycor Deal Shows Growth but Valuation Remains a Stumbling Block

What happened

Paychex reported strong Q2 2026 earnings with 18% year-over-year revenue growth, largely driven by the Paycor acquisition. Cost synergies from the integration are now projected at $100 million for FY26, up from previous estimates of $80 million, indicating better-than-expected operational execution. However, the DeepValue master report cautions that shares trade at a rich P/E multiple of approximately 24, well above intrinsic value anchors around $77 per share. Persistent integration risks and headwinds such as the ERTC expiration continue to pose challenges, as noted in the report's monitoring items. Thus, while operational performance is improving, the stock's elevated valuation tempers enthusiasm for immediate investment.

Implication

The increased synergy projections could boost future earnings, potentially justifying a higher fair value if sustained. Yet, the current P/E of 24 leaves limited upside unless earnings growth accelerates substantially to compress the multiple. Closely monitoring Paycor integration milestones is crucial, as any slippage in synergy capture or cross-sell uptake could erode confidence. Retention metrics must remain robust to support the premium valuation and mitigate risks from integration or market headwinds. Until either the price corrects toward intrinsic value or fundamentals improve more decisively, a cautious approach is warranted.

Thesis delta

The news reinforces that Paycor integration is progressing better than expected, with higher cost synergies supporting earnings growth and potentially easing integration risks. However, the master report's core concern about overvaluation persists, as shares still trade at a premium with limited margin of safety. A shift to a BUY thesis would require sustained synergy realization alongside improved valuation metrics, such as a price pullback or accelerated EPS expansion that compresses the P/E ratio.