Paychex’s (NASDAQ: PAYX) total revenue for fiscal 2019 (ending May) grew 12% year-over-year to $3.8 billion while adjusted EPS grew by 4% to $2.86 as the company continued to witness strong momentum in its human resource (HR) solutions administrative services and solid sales performance in professional employer organization (PEO), retirement, and insurance services. Trefis highlights the trends in Paychex’s Revenues over recent years in an interactive dashboard along with our forecast for fiscal 2020. We believe that Paychex’s revenues should swell by roughly $400 million over the current year primarily thanks to its acquisition of Oasis – helping the top line comfortably breach the $4-billion mark. We estimate Paychex’s valuation to be $80 per share, which is around the current market level.
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A Quick Look At Paychex’s Revenues
Paychex primarily has three revenue sources:
- Payroll Processing: Paychex’s payroll processing services includes the calculation, preparation, and delivery of employee payroll checks. In addition, Paychex also provides employee payment, regulatory compliance, retirement services administration among other services
- PEO Services: Paychex provides professional employer organization (PEO) services to small business clients, wherein it enters into a co-employer arrangement with clients. This allows Paychex to take care of human resources, employee benefits, payroll and workers’ compensation for worksite employee while clients focus on their core operations.
- Interest on Client Funds: This represents interest income earned by Paychex by investing client funds that have not been remitted to applicable tax or regulatory agencies or to client employees in high quality, investment-grade marketable securities.
Who are Paychex’s clients?
- Paychex’s clients are primarily small- and medium-sized businesses (less than 50 employees).
- Paychex’s primary competitor is ADP, but ADP focuses primarily on large clients.
- Paychex is the industry leader among small- and medium-sized businesses.
How Has Paychex’s Historical Revenue Trended?
- Paychex has added more than $620 million to total revenue since 2017 at an average annual rate of 9.4% led by steady growth across all operating segments.
- PEO Services, led by acquisition of Oasis, has been the primary contributor to Paychex’s revenue growth. Moreover, the company has recorded solid client retention-further aiding the revenue growth.
- Going forward, we expect Paychex’s revenues to increase by 11% and reach around $4.2 billion in FY 2020.
Payroll Processing is Paychex’s largest operating segment
- Paychex’s Payroll Processing segment consistently contributes a majority of its revenues, with an average revenue share of more than 80% in the last 2 years.
- However, the segment’s share has declined from above 82% in 2018 to nearly 76% in 2019 due to faster growth in the PEO segment.
- The segment grew by 4% year-over-year in fiscal 2019, contributing more than $110 million to total incremental revenues.
- We expect the segment to continue its sustained growth and record $3 billion in revenues in FY 2020.
- The growth is expected to be driven by growth in the company’s client base across services, along with growth in payroll revenue, and payroll revenue per check.
- Moreover, this segment is likely to benefit from an increase in retirement services revenue which will be driven by an increase in the number of plans served as well as an increase in revenue earned on participants’ assets.
PEO and Insurance Services is Paychex’s fastest growing business
- PEO segment has achieved robust growth in the last couple of years, with revenues increasing from $560 million in 2018 to more than $820 million in FY 2019
- This growth has been led by Paychex’s acquisition of Oasis. Notably, the acquisition of Oasis boosted Paychex’s PEO growth in FY 2019, with Oasis contributing $163.7 million to total revenue, or approximately half the growth in the company’s consolidated total revenue.
- We expect this segment to continue its growth trajectory, with revenues increasing at a rate of 34% to $1.1 billion in FY 2020.
- The segment’s contribution to total revenues has significantly increased over the years, which is expected to continue in the foreseeable future.
Interest on funds held for clients’ contribution has remained constant over the years
- The segment has grown steadily over recent years, adding approximately $30 million in revenue over 2017-2019 (CAGR of 26.2%).
- In 2020, we expect this segment to add nearly $5 million to total revenues.
- The segment’s share to total revenues has remained around 2% over the years, and going forward, we expect its share to remain constant at 2%.
We forecast Paychex’s adjusted EPS for full-year 2020 to be around $3.19. Using this figure with our estimated forward P/E ratio of 25x, this works out to a price estimate of $80 for Paychex’s stock, which is around the current market price.
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