The most recent data for new jobless claims was released by the U.S. Labor Department last week. Applications for jobless benefits rose by 4,000 to a seasonally adjusted 372,000 for the week ending August 18. Additionally, the jobless claims data from two weeks ago was revised upwards by 2,000 claims. While we take these numbers with a grain of salt and look forward to the jobs numbers next week, which will reflect data for all of August, we still view them as an ominous sign for the overall economy. Specifically, we believe that the increase in claims is disappointing news for payroll processors such as ADP (NASDAQ:ADP) and Paychex (NASDAQ:PAYX). Below we examine how a stagnant job market can impact each company’s value.
ADP’s primary source of revenue is its payroll processing business, which currently makes up approximately 75% of the company value. One of the primary divers within this segment is the average number of employees per national payroll account. We currently forecast that this driver will increase to 2,100 thousand by the end of our forecast period. However, if the job market remains stagnant and the average number of employees per national account remains flat until the end our our forecast period, we could see a 5% downside to our price estimate. You can measure the impact that a stagnating job market will have on ADP here.
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- ADP Earnings: PEO Services Drive Q4 And Full Year Results
- ADP Earnings Preview: HR Services, International Business To Drive Results
- What Will Drive ADP’s Revenue And EBITDA Growth In 2016?
- ADP Earnings: HR Services Continue Growth Spree
Paychex, another leading payroll processor, is in the same boat as ADP. Currently, we estimate that the company’s payroll processing division makes up approximately 72% of its total value. Similar to ADP, one of Paychex’s primary drivers is the average number of employees per payroll client, a number whose growth is highly correlated to the state of the U.S. job market. We currently forecast that the average number of employees per payroll client will increase to 19 by the end of our forecast period, but if the job market remains stagnant and the number remains flat, we would see a 7% downside to ADP’s value.
Overall, the sluggish US economy means that ADP and Paychex will struggle to grow their businesses organically in the near future. We will keep a close eye on the jobs numbers for August (expected to release next week) which will provide more insights into the state of the U.S. job market.