Company Reports

Wide-moat Paychex reported reasonable third-quarter fiscal 2024 results despite headwinds from an earlier-than-expected winding down of the pandemic-era high-margin employee retention tax credit, or ERTC, services. As we anticipated, Paychex reported moderating employment and wage growth among small business customers, but the firm continues to enjoy the benefits of its strong retention rates and operational efficiency. Following the result, we maintain our $120 fair value estimate and our long-term outlook. At current prices, Paychex's shares screen as fairly valued.

Paychex's offering appeals to businesses wishing to outsource mission-critical functions, manage and attract employees, and remain compliant with increasingly complex and evolving regulations. We expect increased regulatory complexity, tight labor markets, and a growing adoption of hybrid work will underpin strong demand for Paychex's suite of offerings supporting greater share of wallet and market share gains. This includes greater penetration of the outsourced payroll and human resources model in the small-business market. While we factor in market share gains, we expect increasing competition to limit Paychex's pricing power and force the company to maintain elevated expenditure on software development and innovation to remain competitive.

We maintain our $120 fair value estimate for wide-moat Paychex following second-quarter results that track our full-year top-line and profitability expectations. As we anticipated, Paychex reported moderating employment growth and wage inflation among small business customers, and weak seasonal hiring amid higher costs and constrained access to capital, and macroeconomic uncertainty. Shares fell a sharp 7% after the results release, and now trade in line with our unchanged valuation.

Paychex's offering appeals to businesses wishing to outsource mission-critical functions, manage and attract employees, and remain compliant with increasingly complex and evolving regulations. We expect increased regulatory complexity, tight labor markets, and a growing adoption of hybrid work will underpin strong demand for Paychex's suite of offerings supporting greater share of wallet and market share gains. This includes greater penetration of the outsourced payroll and human resources model in the small-business market. While we factor in market share gains, we expect increasing competition to limit Paychex's pricing power and force the company to maintain elevated expenditure on software development and innovation to remain competitive.

Wide-moat Paychex reported strong first-quarter fiscal 2024 results, with top-line growth exceeding our expectations and profitability broadly in line. Following the result, we have marginally lifted our full-year forecasts to the upper end of guidance, but our longer-term forecasts and $120 fair value estimate are unchanged. Paychex’s longstanding and well-respected CFO, Efrain Rivera, will retire in October 2023 and be succeeded by Vice President of Finance and Investor Relations Bob Schrader. We expect no material shift to the firm’s strategy or capital allocation on the back of this leadership change. At current prices, Paychex shares screen as fairly valued relative to our valuation.

Paychex's offering appeals to businesses wishing to outsource mission-critical functions, manage and attract employees, and remain compliant with increasingly complex and evolving regulations. We expect increased regulatory complexity, tight labor markets, and a growing adoption of hybrid work will underpin strong demand for Paychex's suite of offerings supporting greater share of wallet and market share gains. This includes greater penetration of the outsourced payroll and human resources model in the small-business market. While we factor in market share gains, we expect increasing competition to limit Paychex's pricing power and force the company to maintain elevated expenditure on software development and innovation to remain competitive.

Paychex's offering appeals to businesses wishing to outsource mission-critical functions, manage and attract employees, and remain compliant with increasingly complex and evolving regulations. We expect increased regulatory complexity, tight labor markets, and a growing adoption of hybrid work will underpin strong demand for Paychex's suite of offerings supporting greater share of wallet and market share gains. This includes greater penetration of the outsourced payroll and human resources model in the small-business market. While we factor in market share gains, we expect increasing competition to limit Paychex's pricing power and force the company to maintain elevated expenditure on software development and innovation to remain competitive.

Amid uncertain economic conditions, wide-moat Paychex reported sound fourth-quarter and fiscal 2023 results, with both top line growth and profitability broadly in line with our expectations. Following the result, we maintain our longer-term forecasts and $120 fair value estimate. At current prices, Paychex shares are fairly valued, in our view.

Paychex's offering appeals to businesses wishing to outsource mission-critical functions, manage and attract employees, and remain compliant with increasingly complex and evolving regulations. We expect increased regulatory complexity, tight labor markets, and a growing adoption of hybrid work will underpin strong demand for Paychex's suite of offerings supporting greater share of wallet and market share gains. This includes greater penetration of the outsourced payroll and human resources model in the small-business market. While we factor in market share gains, we expect increasing competition to limit Paychex's pricing power and force the company to maintain elevated expenditure on software development and innovation to remain competitive.

Wide-moat Paychex posted a solid third-quarter fiscal 2023 result that was in line with our expectations. Despite a moderation in hiring activity, the firm enjoyed year-on-year revenue growth of 8% during the quarter underpinned by new client wins, healthy product attachment and like-for-like price increases, partly offset by ongoing weakness in insurance adoption. The firm continues to benefit from increased uptake of nonrecurring employee retention tax credit services, and an uplift in ultra-high margin interest income.

Paychex’s second-quarter fiscal 2023 result exceeded our expectations amid a backdrop of challenging macroeconomic conditions. As expected, employment growth continues to moderate cycling the pandemic era rebound, however, Paychex’s revenue retention has proven resilient relative to our forecasts. This is due to strong retention of larger, higher-value clients and greater product attachment offsetting an uptick of churn in the microbusiness market. Despite a slowdown in hiring activity, the company continues to benefit from tight labor markets and inflationary pressure supporting demand for recruitment, benefits, and outsourced HR solutions, as well HR technology which can support operational efficiencies for clients.

Paychex's offering appeals to businesses wishing to outsource mission-critical functions, manage and attract employees, and remain compliant with increasingly complex and evolving regulations. We expect increased regulatory complexity, tight labor markets, and a growing adoption of hybrid work will underpin strong demand for Paychex's suite of offerings supporting greater share of wallet and market share gains. This includes greater penetration of the outsourced payroll and human resources model in the small-business market. While we factor in market share gains, we expect increasing competition to limit Paychex's pricing power and force the company to maintain elevated expenditure on software development and innovation to remain competitive.

Payroll processors have benefited from robust employment gains during the COVID-19 pandemic recovery. However, while labor markets have proven resilient to date in 2022, we have adjusted our macroeconomic forecasts to factor in a near-term slowdown in economic activity before a recovery from fiscal 2024. We expect aggressive contractionary monetary policy aimed at controlling rampant inflation to curb economic activity and slow hiring activity in the near term. Nonetheless, we expect this contraction to be short lived with a forecast rebound from fiscal 2024 as supply chain shocks fade, and tight monetary policy unwinds. Our updated macroeconomic forecasts are in line with payroll processing peers and are immaterial to our valuation for wide-moat Paychex. At current prices, shares are trading in line with our unchanged $115 fair value estimate.

We maintain our $115 fair value estimate for wide-moat Paychex following fiscal 2023 first-quarter results that were in line with our expectations. At present, the shares trade roughly at our fair value estimate. Separately, we anticipate no change to our outlook as president and COO John B. Gibson Jr. replaces longstanding CEO Martin Mucci upon his retirement in October. Mucci will remain chair of the board.

Paychex's offering appeals to businesses wishing to outsource mission-critical functions, manage and attract employees, and remain compliant with increasingly complex and evolving regulations. We expect increased regulatory complexity, tight labor markets, and a growing adoption of hybrid work will underpin strong demand for Paychex's suite of offerings supporting greater share of wallet and market share gains. This includes greater penetration of the outsourced payroll and human resources model in the small-business market. While we factor in market share gains, we expect increasing competition to limit Paychex's pricing power and force the company to sustain elevated expenditure on software development and innovation to remain competitive.

Paychex reaped the benefits of a labor market recovery and strong demand for solutions to attract, manage and retain employees in fiscal 2022. Revenue increased an impressive 14% year over year, supported by strong sales execution, resilient retention, normalizing employment levels, and like for like price increases. Client retention stood at above pre pandemic levels at year end which we attribute to a skew to upmarket clients, and a greater uptake of add on products resulting in higher switching costs. This revenue growth--paired with operating efficiencies and limits on discretionary spending--underpinned a standout operating margin expansion of 310 basis points on the prior year, to 40%. While the result was broadly in line with our expectations, we increase our fair value estimate 5% to $115 due to time value of money. Following a market correction in recent months, shares are now trading in line with our updated fair value estimate.

Paychex's offering appeals to businesses wishing to outsource mission-critical functions, attract, manage and retain employees, and remain compliant with increasingly complex and evolving regulations. We expect increased regulatory complexity, tight labor markets, and a growing adoption of hybrid work will underpin strong demand for Paychex's suite of offerings supporting greater share of wallet and market share gains. This includes greater penetration of the outsourced payroll and human resources model in the small-business market. While we factor in market share gains, we expect increasing competition to limit Paychex's pricing power and force the company to maintain elevated expenditure on software development and innovation to remain competitive.

We have marginally upgraded our fiscal 2022 forecasts for wide-moat Paychex as we were too pessimistic about the COVID-19 omicron variant’s potential impact on the small business and labor markets. We now expect fiscal 2022 adjusted diluted earnings per share to increase 23% over the prior year to $3.74, up from our previous forecast of $3.60 and in line with updated guidance. As tailwinds from the labor market recovery fade into fiscal 2023, we continue to expect revenue growth to revert to high-single digits underpinned by mid-single-digit industry growth, modest market share gains, low-single-digit price growth, and taking greater share of client's wallet. Our upgraded near-term forecasts are immaterial to our valuation, and we maintain our $110 fair value estimate. At current prices, Paychex screens as overvalued trading at a 25% premium to our valuation. We suspect the market may be extrapolating recent robust top line growth and margin expansion, relative to our view of conditions normalizing from 2023.

Paychex's offering appeals to businesses wishing to outsource mission-critical functions, manage and attract employees, and remain compliant with increasingly complex and evolving regulations. We expect increased regulatory complexity, tight labor markets, and a growing adoption of hybrid work will underpin strong demand for Paychex's suite of offerings supporting greater share of wallet and market share gains. This includes greater penetration of the outsourced payroll and human resources model in the small-business market. While we factor in market share gains, we expect increasing competition to limit Paychex's pricing power and force the company to sustain elevated expenditure on software development and innovation to remain competitive.

Wide-moat Paychex continued to benefit from a recovery in economic conditions in the second quarter of fiscal 2022, driving strong demand for its payroll and human capital management solutions. Second-quarter adjusted operating income increased 24% on a COVID-19 affected prior period, driven by improved operating leverage as more employees return to work, mix shift to higher margin solutions and cost efficiencies from digital sales and service. Client retention remains near record highs as small businesses continue to prove resilient, and the appeal of Paychex's solutions amid an increasingly complex operating environment drove record new business sales. Management solutions reported the strongest result with revenue increasing 14% year over year driven by a larger client base with more employees per client, and higher revenue per client due to like for like price increases and greater uptake of add on modules and services including retirement plans and HR outsourcing solutions. Interest on client funds remained weak due to lower yields, partly offset by an increase in client funds.