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One Analyst's View of Paychex

June 3, 2003
Related Topics: Basic Skills Training, Behavioral Training, Candidate Sourcing, Featured Article
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Charles Trafton, a Boston research analyst at Adams, Harkness & Hill,follows Paychex and other workforce-management vendors so that he can makerecommendations to mutual funds and other clients. Because of several short-termchallenges such as Paychex’s high stock valuation, Trafton has recently beentelling clients to reduce their shares of Paychex. In the long run, however, hesays, "it’s a fantastic company." His other thoughts:

    On the wealthy CEO B. Thomas Golisano: "Look," Trafton says, "billionairesare just like you and me, they just do different things for fun. He’s spenttens of millions of his own dollars running an almost hopeless campaign [for NewYork governor]. But the investment community is quite enamored with him. Paychexhas had incredible earnings and cash-flow growth rates for 20-plus years, andTom’s been at the helm of that."

    On the quality of the Paychex workforce: Trafton says that as Paychex’sstock has skyrocketed, employees have reaped the benefits. "It’s a fantasticcompany," Trafton says, "very well run, and Golisano is looked at verypositively by investors and by his employees. There are a lot of millionaires atthe company that owe him. He’s got a very strong, very deep management team. Alot of middle managers at Paychex are given a lot of authority, and they make alot of money. He’s very well respected internally, within the Paychex salesforce in particular. The sales force is very aggressive and very highperformance."

    On the company’s strengths: Trafton says that Paychex still has a largemarket of businesses to tap into. "The beauty of Paychex," he says, "isthat there are millions of small employers, and most of them still do payrollin-house--gas stations, restaurants, liquor stores. It’s so cheap for Paychexto take it over and take over the liability and do it correctly." In manycompanies, Trafton says, the small-business owner doesn’t want employees toknow how much everyone makes, so the owner does payroll alone. This is atime-consuming hassle that Paychex can help take off a business owner’s desk."Paychex is at the right end of the market with the right kind of services;they’re paying a nice dividend and growing very quickly. They’re moreprofitable than Microsoft."

    On Paychex’s challenges, and the competition: Automatic Data Processing,Inc., a leader in payroll, human resources, and benefits, has a division thatfocuses on small companies, and the firm has a record of consistent growth thatmost any corporation would envy. Still, Trafton says that ADP’s weaknessesleave a big opening for the company. "Paychex has very high client retention,"he says, "unlike ADP, which has a reputation for poor service and has veryhigh client turnover. Paychex is very client-centric and is very efficient."

    In addition to ADP, Paychex is competing with small businesses and local CPAsaround the country. It also has Intuit nipping at its heels, trying to succeedat the payroll business by buying up payroll-processing companies. Other Paychexcompetitors include Fidelity and Ceridian.

    On top of that, Paychex has more obstacles to face, Trafton says. First,unemployment is up, which means fewer checks to process. Second, there are fewernew businesses starting up, and small businesses are Paychex’s sweet spot.Last, interest rates keep getting lower, which hits Paychex’s "float"--theinterest it generates while it holds on to a company’s tax payments, waitingto send them to the IRS. In fact, says Trafton, "future upside [for thecompany’s business] is in the hands of the Paychex sales force, but probablymore so in the hands of the Fed and its interest-rate policy."

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