Why Paychex’s Stock Is Worth $55

by Trefis Team
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Paychex (NASDAQ:PAYX) has witnessed a solid 8-9% revenue growth over the last few years, with fiscal 2015 revenues growing at 7.7% to just under $3 billion. Most of the top line growth has been driven by its HR outsourcing and other services business, which grew at 13% in 2015 and 17-18% in the previous two years. The company has established itself as the market leader for HR outsourcing for small and medium sized businesses.


Paychex’s client base consists of HR outsourcing clients, retirement clients and insurance clients. Among these three client sets, the number of HR outsourcing clients has grown at 11-12% in the last two years while retirement and insurance clients have increased at around 5-6%. With growth in jobs for small businesses likely to continue, Paychex’s HR outsourcing business should continue to reap benefits in this space. [1] We forecast Paychex’s total HR services clients to increase from under 260,000 in fiscal 2016 to over 330,000 by the end of our forecast period.


On the other hand, its core payroll processing business has grown at a steady 3-4%, owing to consistent 2-4% price increases over the last few years to complement the growth in its customer base. We forecast Paychex’s payroll processing revenues to continue to grow at historic rates through the end of our forecast period.


As a result, the net increase in revenues is expected to be driven primarily by HR outsourcing and other services, as shown in the table below.


Paychex’s cash operating expenses have increased roughly in proportion to its revenue growth over the last few years. As a result, the company-wide EBITDA margin (adjusted for non-cash expenses) has remained between 43.5% and 44.2% since 2012. However, with the Fed increasing interest rates in late 2015 for the first time in a decade, it should help boost Paychex’s interest income long-term, though the U.K.’s Brexit vote will likely adversely impact rates in the near term. Consequently, we expect the revenue growth from client funds interest to translate to a gradual improvement in margins, as there are minimal expenses related to interest income.


We have a revised $55 price estimate for Paychex’s stock, which is around 10% lower than the current market price. Paychex’s stock price has increased from $54 in mid June to around $60 in late July after the company reported a strong set of Q4 and FY 2016 results.

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  1. Small-business job growth resumed in June: IHS-Paychex, CNBC, June 2016 []
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