Paychex (PAYX) Last Update 8/9/21
Related: IBM ADP
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Trefis Price
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TREFIS Analysis

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Potential upside & downside to trefis price

Paychex Company


  1. Payroll Processing constitutes 49% of the Trefis price estimate for Paychex's stock.
  2. HR Outsourcing & Other Services constitute 48% of the Trefis price estimate for Paychex's stock.


Rally In Paychex Stock

The shares of Paychex have gained 30% since the February 2020 levels despite a downtrend observed in travel & tourism industry. Notably, the total job losses in leisure and hospitality industry remains 10.3% below February 2020 levels. The rally in Paychex stock has largely been driven by a rising client base and consistent improvement of customer retention rate. Per recent filings, the company reported a client base of 710,000, around 8.8% of the total 8 million employer firms in the U.S. While the payroll process and human capital management services market is highly competitive, Paychex’s growing client numbers and expanding top line is a boon for shareholders. However, the stock looks overvalued considering the historical trends in valuation multiple (P/S) and potential revenue figures in the coming years.

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).

The company’s overall client base and average worksite employees have been rising in the past three years.


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

Payroll Processing

  • Number of Paychex Payroll Clients: We currently forecast the number of payroll processing clients for Paychex to increase going forward from over 670,000 in 2019 to 720,000 by the end of the Trefis forecast period in 2026. However, there could be a 7% downside to the Trefis price estimate if Paychex's payroll accounts fall to 600,000 due to competition from cheaper competitors and online payroll processing companies.
  • Paychex Payroll EBITDA Profit Margin:EBITDA margin for Paychex's payroll processing business has hovered around 42% over 2010-18. The figure declined to 41.1% in 2019, as operating expenses grew at a faster pace as compared to revenues for the division. We forecast the margin to further decline before increasing to 40.6% by the end of the Trefis forecast period. There could be a 9% upside to the Trefis price estimate if Paychex's payroll processing EBITDA margin continues to increase in the future, reaching around 50% by the end of our forecast period.


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.


Number of Paychex Payroll Clients

The number of payroll clients is an important driver of Paychex revenues. As of 2019, Paychex had over 670,000 Payroll clients with an average of roughly 18 employees per client and over $155 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 over 321,000 in 2019.


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 2019, the unemployment rate stood at 3.6%, a ten year low. 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 2009 to 2018 jobs in the small and medium businesses in the U.S. have grown at almost 8% 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.