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Paychex Expands PEO Capabilities with HR Outsourcing Buyout

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Paychex Inc. PAYX appears to be striving to capitalize on the rising opportunities in the professional employer organization (PEO) industry. In this regard, the payroll and human resource solutions provider recently acquired Charlotte, NC-based HR Outsourcing Holdings, Inc. (HROI) for an undisclosed amount.

Founded in 2001, HROI is a well know name in the PEO industry, which, along with its subsidiaries, offers human resource solutions to small and medium-sized businesses in over 35 states across the U.S.

 Importance of HROI Buyout

A PEO is a firm or company to which organizations can outsource their HR functions, including payroll and benefits administration. The benefits offered by a PEO make it a viable choice for organizations.

The most important benefit is that an organization gets full administrative support without investing in technology and employees. Apart from this, a PEO takes care of all aspects of an employee’s tenure. Organizations get trained representatives who can better address their HR related matters. Moreover, the growing regulatory burden on small companies signifies that the need to outsource non-core activities is growing.

Therefore, in our opinion, the acquisition is a strategic fit for Paychex as more and more companies are willing to use PEO services rather than creating their in-house HR management departments. Also, both the companies have similar target customers,  small and medium-sized businesses.

As of May 31, 2017, Paychex had nearly 605,000 payroll clients but the market is still highly untapped. Per the company, there are about 12 million businesses in the U.S. under its total addressable market, half of which are still untapped.

The recent buyout of HROI will expand its services, thereby helping it to add to its customer base.

Bottom Line

The company’s initiatives to boost revenue growth through acquisitions are encouraging. Since its inception, the company has completed 13 acquisitions of which eight were under the leadership of current president and CEO, Martin Mucci.

These buyouts have helped the company to expand its services as well as global reach, thereby boosting its revenues. Notably, in the last five fiscals, i.e. 2012 to 2017, the company has seen its revenues rise at a CAGR of 7.2%.

Going ahead, one of the key secular growth drivers of Paychex is the demand for outsourcing. Human Resource Services outsourcing is a large, less-than-half-penetrated market that offers significant cost saving potential.

The company seeks to capitalize on this opportunity by periodically introducing products and services for upselling to the client base and moving into the mid-market.

However, for the last few months, payroll client growth has been affected by political uncertainty, which in turn is impacting outsourcing-decision making in the mid-market. This was highlighted by Paychex during its fourth-quarter fiscal 2017 conference call.

This makes us sceptical about the company’s near-term performance. Intense competition in the outsourcing space from major players like Automated Data Processing (ADP - Free Report) and Insperity NSP could add to its woes.

Paychex has underperformed the industry to which it belongs to in the last year. The stock has lost 8% of its value in the said period while the industry declined just 1.3%.

Currently, Paychex carries a Zacks Rank #4 (Sell).

A better-ranked stock in the same industry space is Broadridge Financial Solutions, Inc. BR which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The stock has an estimated long-term EPS growth rate of 10%.

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