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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:
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.
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.
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.
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.
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.
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.