Limited Upside For Paychex

There wasn’t much in

The company raised guidance for fiscal 2018 as a result of its acquisition of HR Outsourcing. We suspect this is why the shares reacted so favorably after the earnings release. The acquired firm will add about $60 million-$70 million in revenue, which accounts for all of the increase in guidance. The acquisition will also be mildly dilutive to margins this year. Because we have limited information on the purchase price, we anticipate it’ll have a neutral impact on valuation.

However, we are encouraged that Paychex has seen a modest improvement in retention. The company attributes this improvement to its service realignment and increasing tenure from service associates. however, it is still early in the year and the company’s first quarter typically sees seasonally higher retention. In addition, given competition from more tech-savvy players, we suspect Paychex’s service realignment will be more of an ongoing investment for the foreseeable future. We are still concerned that upstarts and software companies can chip away at Paychex’s existing payroll customers. For Paychex to maintain its wide moat, it’ll have to offer customers more than just payroll, which is why its HRO business and human capital offerings are so important.

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