VALUATION HIGHLIGHTS

1. Management Solutions constitute 72% of the Trefis price estimate for Paychex's stock.
2. HR Outsourcing & Other Services constitute 23% of the Trefis price estimate for Paychex's stock.

WHAT HAS CHANGED?

Paychex Q2 FY'24 Results

Paychex posted a mixed set of Q2 FY'24 results. Revenue for the quarter stood at $1.26 billion, missing estimates, although this marks an improvement from $1.19 billion in the year-ago quarter. Earnings stood at $1.08 per share, slighly below the consensus, although it rose from $0.99 in Q2 FY2023.

Note: Paychex's Q2 FY'24 ended on ended November 30, 2023.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Paychex's value that present opportunities for upside or downside to the current Trefis price estimate for Paychex:

Management Solutions

• Management Solutions Revenue: We currently forecast that Paychex Management Solutions Revenue will rise from around $3.7 billion in FY'22 to over $5.5 billion by FY'30. However, there could be a 15% downside to the Trefis price estimate if the metric only grows to about $4.2 billion, due to competition from cheaper competitors and online payroll processing companies.


• Paychex Management Solutions EBITDA Profit Margin:EBITDA margin for Paychex's Management Solutions business has hovered around 44% in recent years. We forecast the margin to increase gradually to 46% by the end of the Trefis forecast period. There could be a 10% upside to the Trefis price estimate if EBITDA margin continues to increase in the future, reaching around 50% by the end of our forecast period.

BUSINESS SUMMARY

Paychex is a leading provider of human capital management (HCM) solutions including payroll processing, talent management, and employee benefits functions to small and medium-sized businesses. The company classifies its services across two segments, Management Solutions, and Professional Employer Organization. The Management Solutions segment provides all human capital management services including payroll processing, tax administration, HR solutions, and retirement services.

The PEO segment provides a comprehensive employment administration solution where employees working for a client are co-employed by Paychex and the client (worksite employees).

SOURCES OF VALUE

Number of Paychex Payroll Clients

The number of payroll clients is an important driver of Paychex revenues. As of May 2022, Paychex had over 730,000 Payroll clients.

Human Resources Outsourcing

In addition to Payroll Processing, Paychex offers HR Outsourcing, whereby Paychex takes over the HR operations of clients. About two million worksite employees are served through the company's HR outsourcing services.

KEY TRENDS

Declining unemployment rates in the U.S.

The U.S. job market has pick up in recent years, with unemployment rates declining from levels of almost 8% in 2012 to under 4% as of May 2022. 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

Jobs in the small and medium businesses in the U.S. have grown over the last decade, driven by a recovery in the U.S. economy post the financial crisis. 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.