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Investment Overview for Paychex (NASDAQ:PAYX)
Paychex offers payroll processing to businesses of varying sizes around the globe. Payroll processing includes the paper and electronic distribution of employee compensation, along with the processing of tax withholdings and other employee contributions. Businesses save time and resources by outsourcing their payroll processing needs to companies like Paychex.
Below are key drivers of Paychex's value that present opportunities for upside or downside to the current Trefis price estimate for Paychex:
- Number of Paychex Payroll Clients: We currently forecast the number of payroll processing clients for Paychex will increase going forward from 567K in 2012 to 620K by the end of the Trefis forecast period. However, there could be a ~6.5% downside to the Trefis price estimate if Paychex's payroll accounts decline in the future to 540K due to competition from cheaper competitors and online payroll processing companies.
- Paychex Payroll EBITDA Profit Margin: Historically, the EBITDA margin for Paychex's payroll processing business has increased consistently from 40.5% in 2010 to 42.7% in 2012 as revenue growth outpaced the increase in costs for the division. We forecast the margin will increase further in 2013 to ~43% and then increase slightly to ~44% by the end of the Trefis forecast period. There could be ~5% upside to the Trefis price estimate if Paychex's payroll processing EBITDA margin continue to increase in the future reaching 48% by the end of our forecast period.
Number of Paychex Payroll Clients
The number of payroll clients managed by Paychex is an important driver of Paychex revenues. As of 2012, Paychex had over 550,000 Payroll clients with an average of 17 employees per client and over $150 in annual revenue per employee.
Human Resources Outsourcing
In addition to Payroll Processing, Paychex offers HR Outsourcing--whereby Paychex takes over the HR operations of clients. This segment has seen significant growth in recent years, as the number of clients' employees served has increased from 439,000 in 2008 to 615,000 in 2012.
High Small Business Exposure
Small businesses are the most vulnerable in economic recessions and have high bankruptcy risk. Paychex is more exposed to the risks of small businesses than its primary competitor ADP.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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