PAYX Paychex
Sticky payroll franchise with float income tailwind; priced for 8% but 6% is durable.
The business
Paychex provides payroll processing, HR outsourcing, and benefits administration to over 700,000 small and mid-sized businesses. Revenue is largely recurring, with fees tied to client payrolls and funds held earning interest income on the float.
Quality gate · 91/100
Moat & management
| Moat | wide moat |
| Source | switching costs |
| Trajectory | stable |
| Management | excellent |
Switching payroll providers is operationally painful and risky for SMBs, creating high retention. Scale advantages in compliance, regulatory expertise, and integrated HR services reinforce the franchise. The moat is stable rather than widening as newer cloud-native entrants nibble at the low end.
Consistent share count reduction of ~0.5% annually, disciplined dividends, and moderate leverage used sensibly. Management acts like owners with a long track record of rational capital allocation.
Owner-earnings inputs
| Owner earnings (TTM) | 1.97B |
| Owner-earnings yield | 4.5% |
| Free-cash-flow yield | 5.4% |
| Growth used (normalized) | 6.0% |
| Market-implied growth (reverse DCF) | 8.1% |
| Terminal growth | 3.0% |
| Discount rate (hurdle) | 9.3% |
Projected owner earnings
| Yr | Owner earnings | Growth | PV |
|---|---|---|---|
| 1 | 2.09B | 6.0% | 1.91B |
| 2 | 2.21B | 5.8% | 1.85B |
| 3 | 2.33B | 5.6% | 1.78B |
| 4 | 2.45B | 5.4% | 1.72B |
| 5 | 2.58B | 5.1% | 1.66B |
| 6 | 2.71B | 4.9% | 1.59B |
| 7 | 2.84B | 4.7% | 1.52B |
| 8 | 2.96B | 4.5% | 1.46B |
| 9 | 3.09B | 4.3% | 1.39B |
| 10 | 3.22B | 4.1% | 1.32B |
| 11 | 3.34B | 3.9% | 1.26B |
| 12 | 3.46B | 3.6% | 1.19B |
| 13 | 3.58B | 3.4% | 1.13B |
| 14 | 3.70B | 3.2% | 1.07B |
| 15 | 3.81B | 3.0% | 1.00B |
Key risks
- Rising interest rates boosted float income; reversal would pressure growth
- PEO/HR competitors and cloud-native payroll entrants eroding low-end market share
- Economic recession reducing SMB client count and payroll volumes
Catalysts
- Declining rates could expand SMB formation and borrowing, driving client growth
- Cross-selling benefits administration and PEO services into existing payroll base
- Continued share buybacks compounding per-share earnings
Recent news
score · 8 articles
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- HR Software Stocks Q2 Recap: Benchmarking Paychex (NASDAQ:PAYX)
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- Adding Paychex CEO to Board Might Change The Case For Investing In ManpowerGroup (MAN)
⚠ maintenance capex ≈ min(capex, D&A), capped at FCF · Price pays for ~8%/yr owner-earnings growth over 15y (reverse DCF); model credits 6%. · Rich vs our conservative value, but a quality business is not a short — stance is WAIT for a better price, not sell.