EUR 850.00 For Business Accounts Only

Morningstar | Paychex Increasingly Ties Its Future to Its Paid Employer Organization

Wide-moat Paychex's second fiscal quarter revolved around the company's acquisition of Oasis Outsourcing and what contribution the acquired firm would make to the company. According to management, Oasis will contribute somewhere between $155 and $175 million in sales. This implies that Oasis has sales somewhere in the vicinity of $400 million while growing revenues by an upper-single digit percentage. This implies Paychex paid around 3.5 times sales. Given the growth and the ability to integrate the company, this does not strike us as an incredible multiple. The only concerns we have is that Oasis' growth appears to be mostly driven by acquisition and there appears to be some exposure to workers compensation claims. We've adjusted our model to reflect Oasis’ inclusion and will be maintaining our fair value estimate of $58 per share.

After including Oasis, we now expect sales growth of 11%. We do anticipate some cost pressure resulting from the acquisition. Management didn’t appear eager to elaborate on the margin profile of Oasis other than saying margins were comparable to Paychex's existing PEO business. The company didn’t change its outlook, but its guidance doesn’t include any impact from the Oasis acquisition. We’re now expecting adjusted earnings per share of $2.86. However, we’ll warn this could change as we gather more intelligence and Paychex includes it in its financials.

Though there was lots of talk around Paychex’s $1.4 billion acquisition, there was less discussion on payroll. Last quarter, the company grew payroll by 1%. This quarter, there was a modest acceleration as payroll service revenue grew by 3% to 432.6 million. This year, the company has changed its segment reporting format which in our opinion makes it harder to see how payroll is performing. We continue to worry about Paychex’s exposure to software providers stealing small business customers. This quarter, the company saw a small decrease in its average funds held for clients. Given the growth in employment, we worry why funds held for clients isn’t growing. It would suggest to us that the growth Paychex is generating in payroll is mostly tied to price increases.