Easing Regulations Threaten Paychex

Wide-moat-rated,

One positive surprise to us is that the company has already reached one million worksite employees on its HR services platform. This implies that Paychex has already grown its employees served by at least 6% in the first six months of the year which is faster than we expected. Currently, we are anticipating growth of 10%. While we won’t be adjusting our growth estimates for worksite employees, it is a good sign that employers are still using Paychex’s co-employment and employee outsourcing services despite the prospect for easing labor regulations. In addition, we are encouraged that management has maintained its revenue guidance for HR Services.

The Affordable Care Act has served as a sizable tailwind for Paychex. Interestingly, the company did provide some guidance on how a potential repeal of the ACA would impact EPS. Paychex expects that EPS would take a 1% hit to EPS per year over a two- to three-year period. However, management cautioned that EPS could fall by as much as 1.5% in a worst-case scenario.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.