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$31.04 0.20 (0.65%)
7/3/2008 1:00 PM

Paychex, Inc. (PAYX)

CAPS Rating:
****

The Company is a provider of payroll, human resource, and employee benefits outsourcing solutions for small- to medium-sized businesses.

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Avatar weiwentg (80.38) Submitted: 1/12/07 4:41 PM : Outperform Start Price: $33.60 PAYX Score: -3.61

Paychex is one of my favorite stocks. I think it has an economic moat, because of its scale and the high barriers to enter the industry - its small and medium-sized clients don't have a lot of negotiating power, or the ability to form their own payroll divisions, and switching costs are high. The business has scaled well, and operating margins went all the way up to 39% in 2006. Their returns on invested capital are also excellent. They have the ability to cross-sell products to their existing client base, and at the same time, only about 20% of their potential market outsources payroll functions, so PAYX has a lot of potential room to expand - kind of the same position Sysco (SYY) is in. It's a stock you could buy and hold for a long time, but I think it's near fair value today.

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Avatar JASCruz (29.47) Submitted: 3/23/07 7:56 PM

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How did you decide it's near fair value? I have been looking at this stock for a while, and by every valuation metric I use, it seems very overvalued. I love the company, my cousin works there and loves working for them, but it seems the market is pricing a lot of future growth into this stock!

Thanks!

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Avatar CubsBearsBulls43 (99.47) Submitted: 3/27/07 5:22 PM

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I have to disagree with some of your comments. In every mayor business market there are a dozen small payroll processors trying to undercut the pricing from Paychex and ADP. There are also several regional players in this space that are very strong and growing fast. Switching costs are not high at all and all too often payroll services are viewed as a commodity with clients switching as soon as someone offers them a lower price. Many HR firms and banks are forming their own processing companies or are partnering with payroll processors too. The way to win in this market is to offer services beyond payroll ADP is far and away the best at doing that. Less than 20% of their revenue comes from payroll processing. Paychex is a fine company but they are far from safe from competition.

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Avatar advanzio (20.55) Submitted: 5/22/07 4:35 PM

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Gee, I am sure glad I don’t have your patience. I bought PAYX seven spilts ago and so many quarterly dividends ago that I have now given up counting. I know hold over 800 shares from that the 1 block bought way back in the early ‘90’s. If I had waited, I probably would still be waiting today. My average price per share is now less than my annual dividend. So what am I saying? Waiting for a growth, dividend paying stock to come down in price is really not being a fool. It’s just plain dumb. Waiting till you have the cash to buy a block of one hundred shares is also not too smart. I used to think like that until I looked at BRK-B. Sure it’s expensive to buy a block, however you can even buy one or two shares and reap the dividend growth along the way. And yes, I have used those dividends to buy additional shares. Just make sure your broker does not charge you for that purchase. If so, find another broker, fast.

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