The Silver Lining in November’s Employment Summary for Payroll Processors

+0.89%
Upside
250
Market
252
Trefis
ADP: Automatic Data Processing logo
ADP
Automatic Data Processing

The Employment Situation Summary for November released by the U.S. Bureau of Labor Statistics on December 6, 2013, reported fall in unemployment levels to 7% from 7.8% a year earlier. However, this drop in employment was mostly a result of workers discouraged by a poor job market dropping out of the labor force. [1]  The data released on December 19, 2013 for Metropolitan Employment and Unemployment Situation puts these figures in a new light.

The report showed that unemployment rates had fallen in more than 75% of the 372 areas covered. The unemployment rate was also lower than the national average of 7% in 204 of the 372 areas covered. [2] As far as payroll processing companies such as ADP (NASDAQ:ADP) and Paychex (NASDAQ:PAYX) are concerned, this is good news since they derive most of their revenues from clients based in these areas. During times of rising employment, companies hire more people which typically results in more employees per company. As a result, companies such as ADP and Paychex stand to earn more revenue from the increased number of clients served.

In this article, we consider the impact the improving  job situation can have on their value.

Relevant Articles
  1. Will ADP’s Strong Gains Of Recent Years Continue?
  2. What To Expect From ADP’s Q4 Results?
  3. What To Expect From ADP’s Q3 Results?
  4. With The Job Market Holding Up, What To Expect From ADP’s Q2 Earnings?
  5. Forecast Of The Day: ADP Number of Clients Served
  6. Company Of The Day: ADP

ADP

ADP’s primary source of revenue is its payroll processing business, which is directly related to the employment scenario in the U.S. economy and makes up approximately 40% of our value estimate for the company. We gauge the performance of this business based on the average fee received by ADP for every client it serves. When employment levels increase, ADP benefits from increase in hiring activity by its clients that boosts the fee earned per client.

We forecast the average number of clients served to increase to 693,000 by the end of six years. However, if the number of clients served exceeds that figure by 10%, there could be a 4% upside to our price estimate.

Currently, we have a price estimate of $73 for ADP, which marks our valuation at a discount of ~10% to the market price.

Paychex

Paychex is another leading payroll processor in the U.S. According to our model, the company’s payroll processing division makes up approximately 62% of its total value. We gauge the performance of Paychex’s payroll processing business based on the average number of employees served by the company per payroll client. Paychex also benefits from increase in hiring activity by its clients when the employment scenario improves. We forecast the total number of payroll clients to increase to 619,ooo for Paychex in the next five years. However, if the number of clients served by the end of 2020 increases by 10%, there could be a 6% increase to our price estimate.

Currently, we have a price estimate of $35 for Paychex, which marks our valuation at a discount of over 20% to the market price.

Submit a Post at Trefis Powered by Data and Interactive Charts | Understand What Drives a Stock at Trefis

Notes:
  1. US November Employment Summary Situation []
  2. Metropolitan Employment and Unemployment Summary []