Paychex, Inc. (PAYX), Automatic Data Processing (ADP), Intuit Inc. (INTU): This Payment Processor Could Provide Years Of Growth And Income

Page 1 of 2

Paychex, Inc. (NASDAQ:PAYX) is one of the leading payroll processors in the U.S., and in fact several of my previous employers used the company’s services. What I was surprised to find was that Paychex meets all of my criteria for what a long-term investment needs to have. In addition to its long-range merits, I believe there is also some short-term growth to be had, as the success of the company is very closely correlated with the U.S. job market, which I feel has several years of growth ahead, if not more. This under-the-radar stock could possibly be one of the best investments out there.

Paychex, Inc. (NASDAQ:PAYX)

About Paychex

Serving over 567,000 clients, Paychex, Inc. (NASDAQ:PAYX) is one of the largest providers of payroll processing, human resource, and benefit services in the United States. Paychex operates in two main segments, payroll and human resources/professional employer organization (HRS/PEO). Payroll does the preparation of clients’ payroll checks, earnings statements, accounting records, as well as tax returns. The HRS/PEO segment provides HR services, as well as management of employee benefit programs.

Most of Paychex’s clients are companies with fewer than 100 employees. Their biggest competitor, Automatic Data Processing (NASDAQ:ADP), handles companies of all sizes. While some see this as a negative, I view Paychex’s small business specialization as a plus for two reasons. They are well-known as the payroll processor of choice for small businesses, and as the economy improves, small businesses tend to grow at an increased rate, which is very good for Paychex.

Growth

As mentioned before, Paychex, Inc. (NASDAQ:PAYX)’s business is very closely tied to the overall health of the economy and job market. One less obvious thing to consider is the correlation between the company’s profits and the current interest rates. When Paychex processes payroll and other items for their clients, they withhold money, such as taxes, which are not handed over to the proper agency immediately. They also hold reserves in their client’s accounts before the money is paid to employees.

Well, all of this money sitting in Paychex’s accounts earns interest. Now, it is no secret that right now the amount of interest money earns in savings is at an all-time low. However, when interest rates finally do rise, this could unlock an entirely new revenue stream for Paychex and its shareholders.

Other areas of growth include Paychex’s focus on expanding its human resources and benefits services, which the company could profit from more than payroll outsourcing alone.

Dividends and A Great Balance Sheet

Paychex, Inc. (NASDAQ:PAYX) not only has a debt free balance sheet with over $300 million in cash, but they have also increased their free cash flow by an average of 12% annually for the past five years, and analysts expect a 10% forward growth rate as well. As a result of this growth, Paychex has been able to increase its dividend every single year over the past decade, and currently offers a yield of just under 4% annually.

Valuation and Competition

Given the company’s potential for growth with an improving job market, and later down the road, with increased interest rates, the current valuation of 22 times earnings seems reasonable, especially with the high dividend yield and great balance sheet.

As mentioned earlier, Automatic Data Processing (NASDAQ:ADP) is the market leader in payroll processing, and they operate all over the world. They have a similar number of business clients as Paychex (570,000), but they serve larger businesses, on average.  In addition, they have a thriving “dealer services” segment, which provides transaction systems and professional services to automotive and truck dealers all over the world.

I don’t view ADP as too much of a threat, as the market for payroll outsourcing is relatively untapped in the small business market, and there should be plenty of opportunities for both of these companies to grow over the coming years.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

The 10 Most Peaceful Countries in the World

5 Big Reasons Communism Failed

The 15 Most Famous Carl Icahn Quotes

10 Scary Animals that are Actually Harmless

The 8 Most Famous Singer-Actors in Entertainment

The 10 Longest Wars of All Time

The 13 Worst Looking Foods that Taste Great

The 6 Most Gruesome Injuries Suffered During a Sports Match

The 20 Biggest Contracts in MLB History

The 7 Worst Blown Calls in Sports History

7 Free Ways to Advertise Your Business Online

The 18 Best R&B Songs of the 90’s

The 10 Most Dangerous States to be a Cop

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!