Introduction
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%
Conclusions
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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