- Paychex generated $2 billion in revenues in 2012, with a
42% EBITDA margin.
- The payroll processing division is the biggest part of the
company making up approximately 60% of the company's value. HR
outsourcing makes up 33% of the firm and cash cash makes up the
- Paychex's average employees per payroll client were
approximately 17 in 2012 and we expect this number to increase
to near 20% by the end of our forecast period.
) is one of the two major publicly traded
payroll processors in the United States. The company
generates revenues by processing employee
payrolls which includes paper and electronic distribution
of employee compensation along with the processing of
tax withholdings and other employee contributions. The
company primarily competes with much bigger ADP (
), which has a market capitalization of approximately $30 billion
compared with Paychex's market capitalization of $12 billion.
Paychex generated approximately $2 billion in revenues and had
EBITDA margins of approximately 42% in 2012, and we think that both
of these metrics will rise over our forecast period. The company
has two primary divisions, payroll processing, which makes up 60%
of the firm's value, and HR outsourcing, which make up over 30% of
See our complete analysis of Paychex here
Payroll Processing Tied With Employment Growth
As mentioned above, Paychex's payroll processing division makes
up approximately 60% of the firm's value. The primary driver of
this division is the number of employees per client payrolls, as
the company gets paid on a per employee basis.
We estimate that in FY 2012 the company was processing
approximately 9.5 million employee payrolls, as it had 567,000
clients with an average of 17 employees per client. We think that
both the average client employees and number of clients will
increase over our forecast period to approximately around 19 and
620,000 respectively. The primary rationale for both of these
forecasts is that we expect the global economy to improve in the
next couple of years which should spur hiring growth and new
business creation. In a scenario where the
global economic environment in 2-3 years time
worsened and the average employees per payroll client fell to 16 by
the end of our forecast period, we would
see approximately 10% downside to our price estimate.
HR Outsourcing is The Primary Growth Driver
While Paychex's payroll division has been
a relatively stable revenue source of revenues over the
past couple of years, the company's HR outsourcing division has
been the primary contributor of growth. The division's revenue
increased 13% in FY 2012, primarily due to price increases and
growth in both clients and client employees.
As with the firm's payroll processing division, Paychex's HR
outsourcing division is also dependent on the number of employee's
the company serves. In FY 2012, the firm had approximately 615,000
client employees, and we expect this number to grow to
approximately 800,000 by the end of our forecast period. The major
driver of this growth will likely be the result of Paychex
up-selling to existing clients and also a potential economic
recovery in the United States, which will increase the number of
employees at their existing clients. For sensitivity purposes, if
the number of HR outsourcing client employees served stayed flat
over our forecast period, we would see approximately 5% downside to
our price estimate.
We currently have a
$35 price estimate for Paychex
, which is approximately 10% above the current market price.
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