October 7, 2022

StrategisChhr

Skillful Business Crafters

Paychex, CarMax Earnings Reveal the Stock Market’s Tug-of-War

Stock market indexes kept moving higher Wednesday, maintaining momentum from Tuesday’s healthy bounce. Investors remain concerned about ongoing threats like the COVID-19 pandemic and inflation, but they’ve been willing to see how things play out before jumping to bearish conclusions. As of 2 p.m. ET, the Dow Jones Industrial Average (DJINDICES:^DJI) was up 171 points to 35,664. The S&P 500 (SNPINDEX:^GSPC) climbed 27 points to 4,676, and the Nasdaq Composite (NASDAQINDEX:^IXIC) picked up 80 points to 15,421.

A couple of popular stocks released their latest earnings results, and what they said sheds some light on what’s happening with the broader economy. In many ways, investors are in the middle of a tug-of-war between bullish macroeconomic trends and potential unforeseen obstacles to future growth. Below, you’ll learn what Paychex (NASDAQ:PAYX) and CarMax (NYSE:KMX) said about their quarterly performance and what means for the broader market.

Image source: Getty Images.

Paychex gets paid

Shares of Paychex were up 5{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} on Wednesday afternoon. The payroll and HR specialist posted solid results in its fiscal second-quarter financial report, which made shareholders more confident about its future.

Paychex’s quarterly numbers were strong. Sales rose 13{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} to $1.11 billion, lifted by a similar rise in service revenue. Adjusted earnings of $0.91 per share were up 25{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} year over year and topped investor expectations as well. The company pointed to rising employment figures among its clients and solid customer retention figures.

Paychex explained that client needs have evolved and grown during the COVID-19 pandemic. Companies need advice in getting the talent they need, and Paychex can offer help in structuring benefits packages and other incentives to keep current workers on the job while enticing candidates to sign on as new employees. Paychex has seen success from its Flex digital platform, and it anticipates 10{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} to 11{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} revenue growth for the entire 2022 fiscal year, with earnings growth of 18{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} to 20{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} on an adjusted basis.

Investors liked what they saw from Paychex three months ago, so it was good for the company to keep up its winning streak. If employment trends remain favorable, Paychex could keep gaining ground.

CarMax hits the brakes despite strong business performance

Shares of CarMax fell 7{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b}. The move lower came despite what appeared to be solid third-quarter financial results.

CarMax reported growth in many key metrics. Revenue of $8.5 billion was a new record and was nearly 65{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} higher than previous-year levels. Earnings per share grew at a slower 15{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} rate year over year, reflecting the relatively narrow gross margin on sales. Yet retail unit sales were up 17{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b}, and wholesale unit sales jumped 49{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b}. Average selling prices soared more than 30{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} to $6,600 on the retail side and almost 60{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} to $3,600 on the wholesale side.

CarMax also stepped up its purchase activity from customers in the quarter, buying more than 383,000 vehicles. That was 91{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} higher than a year ago, with half of the sales coming from CarMax’s instant appraisal online service.

After an initial pop in the stock, CarMax shareholders seemed to conclude that positive conditions in the industry weren’t likely to persist in the long haul. That doesn’t mean CarMax can’t make plenty of money in the short run, but if industry supply and demand reverts to more normal levels, then it could reverse some of the gains the company has seen.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.


https://www.fool.com/investing/2021/12/22/paychex-carmax-earnings-reveal-the-stock-markets-t/