Sunday, June 1, 2014

Paychex (PAYX)

Paychex, Inc. is a Delaware based Corporation formed in 1979. It is a provider of payroll and integrated human resource and employee benefits outsourcing solutions for small to medium sized businesses.
Discussion of Business
Paychex over the past year have been focusing on market segmentation mainly in payroll and retirement services and increased development of franchise and banking services. They continue working on their leading-edge technology and mobility platform by adding more capabilities. Paychex continues to enhance their software-as-a-service “SaaS” solutions, positioning to capture the opportunity from the shift to online and SaaS solutions.
Paychex is in a strong financial position as they have historically have funded operations, capital purchases, business acquisitions, and dividends through earnings. They are currently paying 3.41% dividend and there has been over 10 years of interrupted dividend payments.
Growth Opportunities
New ACA rules provide client growth potential as are the new regulations in Brazil. Paychex has recently announced that they are expanding their payroll and HRS offerings into South America through a joint venture in Brazil, a significant market for the company with a growing economy. Paychex has also announced that they have acquired a payroll provider in Germany working toward increases in revenue, client base and product offerings abroad to capture a greater share of the foreign payroll market
Comparison to competitors
Paychex is a low cost producer of payroll service operating with a low COGS (5yr average of 30.16% of total revenue), they have also seen a declining COGS over the past 5 years. This is compared to their competitor in payroll services Automatic Data Processing (ADP) which COGS is at 59.18% TTM. Through being a lower-cost provider the net margin is broader than competitors
Balance Sheet Analysis
Paychex operates with a current ratio of approx. 1.11. Paychex has a very clean balance sheet with no debt while the company has also been growing its equity over the past 5 years with a 5yr growth rate of 7.18%

While Paychex is a very profitable company and one that operates with a strong financial position it trades at 25 times earnings and over 8x book value. Paychex is a company with growth potential however and will show increased revenues with their expansion into foreign markets. My conclusion is that it is a profitable company that seems to be under capable management however it is pricey at their current valuation for a company that is averaging a 5% growth rate

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