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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 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 to increase going forward from 570,000 in 2013 to 619,000 by the end of the Trefis forecast period in 2020. However, there could be a ~6.5% downside to the Trefis price estimate if Paychex's payroll accounts decline in the future to 540,000 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 42.8% in 2010 to 44.1% in 2013 as revenue growth outpaced the increase in costs for the division. We forecast the margin will increase further in 2014 to 44.3% and then increase slightly to 45.5% 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 continues to increase in the future, reaching 48% by the end of our forecast period.
Number of Paychex Payroll Clients
The number of payroll clients is an important driver of Paychex revenues. As of 2013, Paychex had over 570,000 Payroll clients with an average of 17 employees per client and over $162 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 served has increased from 143,000 in 2008 to 195,000 in 2013.
Declining unemployment rates in the U.S.
During the recession, unemployment rates in the U.S. had increased drastically as many businesses laid off employees to reduce costs. The U.S. unemployment rate peaked at 10% in October 2009. However, driven by a recovery in the U.S. economy, businesses have began hiring again. Post October 2009, the unemployment rate has been declining month-on-month. In May 2014, the unemployment rate stood at 6.3%. Declining unemployment rates are beneficial to Paychex since it could lead to an increase in its checks per payroll metric. This metric indicates the number of employees per client that Paychex caters to and an increase in this number will have a positive impact on Paychex's revenue.
Growing jobs in small and medium sized businesses
From October 2009 to May 2014, jobs in the small and medium businesses in the U.S. have grown 7.7% driven by a recovery in the U.S. economy. Paychex's core payroll services are targeted at small and medium-sized (less than 50 employees) businesses. Growth in jobs at these businesses will help drive Paychex's clients and revenues.
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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