Company Description:
Paychex, Inc. is a provider of human capital management (“HCM”) solutions for payroll, benefits, and human resource insurance services for small- to medium-sized businesses, with an outreach to nearly 700,000 clients. The company offers a wide array of services: from payroll processing and tax administration to regulatory compliance and HR solutions.
Valuation
The payroll processing space is fairly small, with ADP being the only other major competitor. We keep in mind our current P/E multiple (on 2020 earnings) of 32x for ADP when we conduct the valuation for Paychex, in addition to applying a 2x premium due to incremental top-line tailwinds. When we apply the resulting multiple of ~34x to our 2020 EPS estimate of $2.90, we reach a target price of $99.
Key Near-Term Tailwinds
See 6% Y/Y Growth in Management Solutions Revenue: We expect approximately 170 bps in revenue growth acceleration for this segment from 2019, driven by larger-than-expected growth of new accounts and some targeted pricing hikes. While we do not have specific figures across concrete client accounts, it is our understanding that nearly all new clients will be aligned across a higher pricing structure.
Oasis to Remain Core Driver for PEO and Insurance Services, With Overall Segment Growing 22% Y/Y: We expect demand for PEO services – essentially growth in existing client base – to remain in double digits. As always, it is important to separate increases in clients and worksite employees, which should both enjoy 15%+ Y/Y increase. At the same time, we note that PEO insurance costs should decelerate from 40% Y/Y growth to approximately 35%, according to our model, thus translating into about 1.7 cents in EPS savings.
Expect Dividend to Grow in Upper Single Digits Y/Y: With the yield currently at 2.93%, Paychex’s dividend story has stood well over the years, particularly
