Is The Market Pricing Paychex Fairly?

by Trefis Team
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Upside
79.72
Market
79.84
Trefis
PAYX
Paychex
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Paychex, Inc (NASDAQ: PAYX) engages in the provision of human capital management solutions for payroll, human resource, insurance, and retirement for small and medium sized businesses. During the latest quarter, net sales of the company increased by 9% y-o-y to $862.8 million, driven by growth across all major human capital management (“HCM”) product lines and professional employer organization (“PEO”) services. In particular, the company’s comprehensive human resource (“HR”) outsourcing solutions, retirement services, insurance services, and time and attendance solutions performed well. The service delivery also remained strong as the company continued to experience favorable client retention results. The benefits of tax reform and the enhanced product solutions continued to strengthen the company’s market-leading position. The acquisitions of HROI, PEO, and Lessor Group in FY2018  also contributed to the total revenue growth for the company and the management remains enthusiastic about the further growth opportunities these are likely to offer.

Looking ahead, Paychex will grow stronger as growth prospects in International markets remain strong. The company’s operations in new geographies benefited post acquisition of the Lessor Group as the company continues to expand. Total revenue for Paychex is comprised of service revenue and interest on funds held for clients.

We anticipate the company to post progressive results in FY2019, as the management remains focused on the strategic initiatives to create long-term shareholder value by balancing top-line growth and strong margins. Enabled by its strategies, the company plans on driving out cost, improve financial resilience, and invest in growth over the next three years.
We thus expect the company’s revenue to be around $3.6 billion for FY2019 and net income margin to be 28.5%. We assume a Price-to-Earnings multiple of 25.6x and an average share count of 361.5 million, translating into a share price estimate of $73 per share, a tad up from the current market price.
  

Detailed steps to arrive at our price estimate are outlined in our interactive dashboard Is Paychex Inc. Fairly PricedYou can modify the key value drivers to see how they impact the company’s revenues, bottom line, and valuation.

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