Wednesday, 30 September 2015

Paychex - outsourcing and regulation theme beneficiary

I have never looked at Paychex before but on a quiet day for US corporate reporting it caught my attention. Here is how they see themselves:

Paychex, Inc. is a recognized leader in the payroll, human resource, and benefits outsourcing industry, with a steadfast commitment to success and a record of achievement that continues a tradition of delivering excellence.
The company was founded in 1971 by B. Thomas Golisano with just $3,000 and a good idea – to make payroll outsourcing easy and affordable for small businesses. From those early days with just one employee, Paychex now has more than 12,000 employees serving more than half a million small- to medium-sized businesses nationwide.
Outsourcing is a powerful theme and certainly payroll, HR and related are products which pertain to this. Listening to the conference call I got the impression this was a management team who knew what they were doing - and you could not argue with the historic results...

(h/t @warrenofwallstreet)
...and the positive outlook:

I liked the general tone on the conference call too as I live tweeted: 
Impressed. On payroll side said 2-4% price rises sticking, bookings solid.
The comments around higher regulation helping their healthcare associated business also sounded a continuing positive - which is why the HR functions as noted above are growing faster than the more classic pay functions.  
Of course the more classic payroll operations are still the majority of operations on a revenue basis: 

So many thematic (regulation, outsourcing) positives. The question I have is more what you pay.  
I like the ungeared balance sheet (EV c. US$16bn) and if I extrapolate the below-noted profitability I could see prospectively a mid x13s EV/ebit...

...which actually is pretty reasonable especially for a company with no debt (and judging by the conference call no huge willingness to do a lot).  The 3.4% dividend yield is also nicely covered too.  
Overall I am pretty impressed, far more than I thought I would be.  I am looking for an opportunity to get involved.  Sub US$40 feels a double up level. 

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