Paychex, Inc. (PAYX), Intuit Inc. (INTU): 5 Reasons You Will Like This Stock

But I do not consider Automatic Data Processing a serious threat to Paychex, mainly due to its target customers. Automatic Data Processing generally caters to bigger companies, while Paychex is well known among the small and midsized companies. Further, competition in the small and midsized business is relatively lower, and Paychex is already a market leader. Paychex also has a competitive advantage with respect to its margins. Despite its higher revenues, Automatic Data Processing has a much lower operating margin (18% in FY12) vs. Paychex (38% in FY12) and Intuit, Inc. (28% in FY12).

The latest and strongest threat to Paychex is from companies that develop do-it-yourself payroll software and equipment. Intuit, Inc., which is the largest provider of online payroll service with their QuickBooks Payroll solution, is one of them. The online software is available for just $20 on a monthly basis and is used by over 1 million companies. It has increased its revenue in the last five years by CAGR of 6% vs. Automatic Data Processing’s 4% and Paychex’s 1.5%. But I believe Paychex has a competitive advantage, as there will still be some companies that will outsource their payroll requirements due to increasing compliance and regulatory requirements.

Conclusion

Given the fact that changing from one processing vendor to another is a burdensome process, Paychex’s market share remains intact. Further, Paychex has a strong retention rate (80% in FY12), which gives it pricing power over its customers as well as a downside protection. This way it can make modest price increases during good times as well as maintain its pricing during recessionary periods.

As explained above, Paychex has many factors working in its favor, and its low PE is another feather in the hat. Hence, take advantage of the current run in the stock and hold it for the long run.

The article 5 Reasons You Will Like Paychex originally appeared on Fool.com and is written by Sujata Dutta.

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