VALUATION HIGHLIGHTS

1. Management Solutions constitute 71% of the Trefis price estimate for Paychex's stock.
2. HR Outsourcing & Other Services constitute 23% of the Trefis price estimate for Paychex's stock.

WHAT HAS CHANGED?

Paychex Q1 FY'25 Results

Paychex posted a better-than-expected set of Q1 FY'25 results. Earnings came in at $1.16 per share beating estimates and rising 2% compared to last year. Total revenues stood at $1.32 billion up 3% year-over-year.

Note: Q1 FY'25 ended August 31, 2024. Paychex's FY'24 ended on ended May 31, 2024.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Paychex's value that present opportunities for upside or downside to the current Trefis price estimate for Paychex:

Management Solutions

• Management Solutions Revenue: We currently forecast that Paychex Management Solutions Revenue will rise from around $3.7 billion in FY'23 to over $5.5 billion by FY'30. However, there could be a 15% downside to the Trefis price estimate if the metric only grows to about $4.2 billion, due to competition from cheaper competitors and online payroll processing companies.


• Paychex Management Solutions EBITDA Profit Margin: EBITDA margin for Paychex's Management Solutions business has hovered around 44% in recent years. We forecast the margin to increase gradually to 48% by the end of the Trefis forecast period. There could be a 10% upside to the Trefis price estimate if the EBITDA margin continues to increase in the future, reaching around 51% by the end of our forecast period.

BUSINESS SUMMARY

Paychex is a leading provider of human capital management (HCM) solutions including payroll processing, talent management, and employee benefits functions to small and medium-sized businesses. The company classifies its services across two segments, Management Solutions, and Professional Employer Organization. The Management Solutions segment provides all human capital management services including payroll processing, tax administration, HR solutions, and retirement services.

The PEO segment provides a comprehensive employment administration solution where employees working for a client are co-employed by Paychex and the client (worksite employees).

SOURCES OF VALUE

Number of Paychex Payroll Clients

The number of payroll clients is an important driver of Paychex revenues. Paychex had over 730,000 Payroll clients as of 2023.

Human Resources Outsourcing

In addition to Payroll Processing, Paychex offers HR Outsourcing, whereby Paychex takes over the HR operations of clients. About two million worksite employees are served through the company's HR outsourcing services.

KEY TRENDS

Declining unemployment rates in the U.S.

The U.S. job market has picked up in recent years, with unemployment rates declining from levels of almost 8% in 2012 to levels of around 4% as of May 2024. Declining unemployment rates are beneficial to Paychex since they could lead to an increase in its checks per payroll metric. This metric indicates the number of employees per client that Paychex caters to and an increase in this number will have a positive impact on Paychex's revenue.

Growing jobs in small and medium-sized businesses

Jobs in the small and medium businesses in the U.S. have grown over the last decade, driven by a recovery in the U.S. economy post the financial crisis. Paychex's core payroll services are targeted at small and medium-sized (less than 50 employees) businesses. Growth in jobs at these businesses will help drive Paychex's clients and revenues.

High small business exposure

Small businesses are the most vulnerable to economic recessions and have high bankruptcy risk. Paychex is more exposed to the risks of small businesses than its primary competitor ADP.