Paychex: A Company That Prints Money

Mar. 04, 2019 11:10 AM ETPaychex, Inc. (PAYX)16 Comments9 Likes
Yanni Lodato profile picture
Yanni Lodato


  • Paychex offers investors a formidable business with strong operational advantages.
  • The company displays healthy financials, high profitability, and a stable growth trajectory.
  • Paycheck makes a great portfolio addition at a more reasonable valuation.

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Paychex (NASDAQ:PAYX) remains a fantastic investment within the consumer defensive payroll processing and insurance space. Stable dividends, continued capital appreciation, and efficient revenue generation remain key operational advantages. The company's stable and recessionary resistant product offerings furnish significant appeal for any all-weather investment portfolio. This article provides a deeper dive into PAYX, discussing fundamental business strengths, growth opportunities, financials, and the stock's current valuation.

Investment Thesis

With $3.4 billion in annual revenues, PAYX is the second largest operator in the U.S payroll processing space. The company demonstrates a considerable array of competitive advantages, including a stable revenue generation model, exceptional management, astronomical profit margins, and encouraging future growth prospects. At its business core, PAYX benefits from operational stability. The company's payroll, human resource, insurance, and retirement management solutions are fundamental elements of everyday businesses, assuring steady and unrelenting demand for the company's various service offerings. PAYX provides payroll processing services to over 200,000 medium and small-sized businesses throughout the United States, demonstrating a low revenue concentration in any single customer. The company's substantial customer network also provides a self-proliferating marketing network as PAYX's commercial customers can facilitate referral business to friends, family members, or business associates. PAYX has historically maintained a client retention ratio upwards of 80%, demonstrating the value, reliability, and cost-effectiveness of the company's service offerings.

PAYX operates a consumer defensive business that is subject to unwavering customer demand. Despite fluctuations in the U.S economy, the company's payroll management remain steady and do not experience a precipitous decline. For example, despite unemployment levels rising to a high of 10% during the Great Recession, Paychex's top line revenues were unaffected. Revenue growth only slightly decelerated in 2008-2009 before resuming its expansionary trajectory over the next few years.

PAYX also benefits from a number of intrinsic business advantages. Payroll, accounting, and bookkeeping businesses accommodate some of the highest profit margins of any industry due to their limited operational expenditures. PAYX incurs only land leasing, server/electricity, marketing, and employment expenses, drastically curtailing the operational costs of its business. PAYX operates a 3.4 billion dollar annual payroll operation with merely 14,000 employees. The company boasts an astronomical gross margin of 69%, net profit margin of 28%, and free cash flow conversion rate of 33%. PAYX's operational efficiency ensures a high cash flow business that is strategically positioned for future success.

ChartData by YCharts

From an executive oversight standpoint, PAYX is well positioned. PAYX boasts unparalleled return on invested capital, stable profit margins, secure financials, and strategic growth initiatives. PAYX has fostered an astronomical cash return on invested capital of 51% suggesting overwhelmingly effective capital deployment. I typically look for businesses with a CROCI in the mid- to high teens, but PAYX far surpasses this benchmark percentage, suggesting significant competitive advantages and revenue generation efficiency. PAYX also exhibits a pristine balance sheet; the company has no outstanding debt obligations (a rare characteristic in the U.S' overleveraged corporate environment), significant liquidity reserves of $720 million, and positive shareholder equity. PAYX's healthy financial positioning better enables the company to perform acquisitions, deploy capital, expand into international markets, and outcompete peers.


In addition to secure operational and financial characteristics, PAYX demonstrates a stable growth trajectory. The company has tactfully bolstered its service offerings through various business acquisitions. In 2018, PAYX acquired Oasis: the largest privately held employer organization in the United States, conferring more than 8,400 new business clients. Earlier in that year, PAYX also acquired The Lessor Group, an international payroll powerhouse in Northern Europe allowing the company to drive growth in untapped international markets. Historically speaking, PAYX has almost exclusively operated in the U.S market with only a minor presence in Germany. The company's inclination for international growth allows for phenomenal revenue expansion opportunities. Although the U.S market has plateaued in terms of the unemployment rate, PAYX still exhibits a strong growth runway as a result of increased market penetration. PAYX accounts for only a small fraction of the U.S payroll services market. With payroll services amounting to a 40 billion dollar industry in the United States, PAYX encapsulates only 8% of the total market, providing considerable room for revenue and market share expansion. PAYX's intuitive, cost-effective, and comprehensive payroll and bookkeeping solutions will continue to gain market share long into the foreseeable future.

PAYX also exhibits strong financial motivations for investment. The company has exhibited sustained capital appreciation and elevated dividend distributions. PAYX has increased its dividend for the past eight years and the current yield of 2.89% provides enticing investment appeal. However, in spite of these attractive investment characteristics, PAYX is slightly overvalued. Based on a discounted cash flow valuation, PAYX's current share price of $77.43 exceeds the future cash flow value in the low $60's suggesting roughly a 20% trading premium.

ChartData by YCharts

Final Determination

PAYX operates a competitively advantaged, well managed, and formidable business operation. The stock offers significant appeal as a result of its compelling 2.89% dividend yield and continued capital appreciation. Although I wouldn't recommend investment at 52-week highs, PAYX remains a fantastic stock to add to the portfolio in the event of a decent pullback.

Author's note: Thanks for taking the time to read the article. If you found this report insightful and would like to be notified when I publish future stock articles, make sure to (Click here) and follow all my new and existing investment research reports.

This article was written by

Yanni Lodato profile picture
Oracle Investment Research helps individual investors find high-quality stocks with strong competitive advantages suitable for long-term holding. We cover dividend stocks, us stocks, and high growth advantageous risk reward stock opportunities ----------------------------------------------------------------------

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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