Despite Difficult Jobs Environment, Paycheck (PAYX) Has a Bright Future
Paychex (NASDAQ:PAYX) offers payroll processing to businesses of varying sizes around the country. The company charges per employee at its client firms. At first glance, the poor workforce figures in the U.S. with 9% unemployment might indicate a difficult landscape for the company. However, Paychex has actually remained relatively healthy. In the fiscal year ending May 2011, the firm generated over $2 billion in revenue along with $500 million in net profits. The quarter ending this past September also generated surprisingly more income than analyst expectations.
The company’s current share price is hovering around the Trefis $29 target. However, continued improvement in the underlying dynamics of the business could push the stock further. In particular, Trefis projects that the fee per employee serviced will grow from $165 in 2011 to $220 in 2018. Any appreciation of this rate will put vastly improve Paychex business model and stock price.
Strong Underlying Business Model Keeps Profits Healthy
Paychex maintains a strong business for several fundamental reasons. Firstly, the model to outsource helps small, medium and even large enterprises by removing the need for a large human resources or information technology departments. Secondly, the company can automate payroll processing through its software. This creates tremendous economies of scale with very little variable costs per new client.
Despite Advantages, Risks Remain
- Can Paychex Stock Recover To Its Pre-Inflation Shock Highs?
- Can Paychex Stock Recover To Its Pre-Inflation Shock Highs?
- With The Job Market Holding Up, What To Expect From Paychex Q2 Results?
- What To Expect From Paychex Q1 Results
- What’s Happening With Paychex Stock?
- Forecast Of The Day: Paychex Management Solutions Revenue
One potential risk for the company is the potential for a cheap or free Web 2.0 alternative payroll outsourcing firm. Although service might not be as good, the explosion of seed funded internet companies such as Canadian based Payment Evolution could pose a threat.
However, a rapid decline in employment would be a much greater threat to Paychex. As the economy sheds jobs, Paychex would inevitably be affected by a drop in employees serviced. In addition, competition with rival ADP (NASDAQ:ADP) would become increasingly fierce for new clients.
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