How Are Selling Expenses Expected To Drive Paychex’s Overall Profitability?

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Paychex’s (NASDAQ: PAYX) total expenses have risen steadily, going from $2.34 billion in 2017 to $2.73 billion in 2019. However, as a percentage of total revenues, expenses dropped, going from 74.1% in 2017 to 72.4% in 2019.
Selling, general & administrative expense is the biggest expense head for the company, coming in at 31.1% of revenue in 2017, before rising to around 32.4% of revenue in 2019. Despite this, a growth in revenue and a simultaneous drop in tax expense, helped bring in an additional $0.58 in earnings per share between 2017 and 2019.
Also, with an expected growth in revenue in 2020, SG&A as % of revenue is expected to drop slightly, leading to a projected growth in net income margin from 27.6% in 2019 to 27.8% in 2020.
Further, in 2021, net income margin is set to rise marginally to around 27.9% and this, combined with a projected rise in revenue, has helped drive a ~25% rise in Paychex’s share price over the past year.

In our interactive dashboard Paychex Expenses: How Does PAYX Spend Its Money?, we take a look at the key drivers of Paychex’s expenses and net margins.

Paychex’s Net Income Margins have remained volatile, rising slightly from 25.9% in 2017 to 28.9% in 2018, before dropping to around 27.6% in 2019. Going forward, margins are expected to rise marginally, to 27.8% in 2020 and 27.9% in 2021.

Breakdown of Paychex’s Total Expenses

  • SG&A expense rose from $980 million in 2017 to $1.22 billion in 2019. This is the largest expense head for the company, coming in at 31.1% of revenue in 2017 before rising to around 32.4% in 2019. Going forward, we expect this expense to rise to around $1.42 billion by 2021, but a simultaneous growth in revenue means that it would still come in at around 32.1% of revenue.
  • Other Operating expenses have risen from $920 million in 2017 to $1.18 billion in 2019, at a rate faster than that of revenue growth. This metric largely includes any operation costs the company incurs in running its automated payroll systems and placing third-party employees at client locations. As a % of Revenue, this expense has risen from 29.1% to 31.2% during the same period. With a steady expected rise in revenue going forward, we expect this metric to come in at around 31% by 2021.
  • Net Interest Expense has dropped from $5.2 million in 2017 to -$3.3 million in 2019, even though total debt has increased from $166 million to $1.04 billion over the same period. However, increasing interest income has helped keep net interest expense low. Going forward, we expect net interest expense to come in at around 3.8% of total revenue in 2020 and 2021.
  • Income Tax Expense has decreased from $433 million in 2017 to $334 million in 2019, with Effective Tax rate falling from 34.7% to 24.3% during the same period. Effective tax rate is expected to be around 22.5% in the near term.

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