Starrob posted this on some services’ boards and I thought it was worth sharing. The Credit Suisse analyst also believes Ultimate Software (ULTI) is benefiting from increased market share:
Last week, PAYX (not covered), a business process outsourcing (BPO) provider of payroll/HCM solutions for small to medium-sized businesses (SMBs), reported F4Q17 results that were roughly in line with consensus, but introduced FY2018 revenue growth guidance of ~+5% yr/yr, which implies ~$3.31B revenue, below prior Street of $3.35B. Management highlighted: (1) total payroll clients of ~605K (flat yr/yr, down from +3% yr/yr in FY2016) as client growth was impacted by a challenging demand environment and lower payroll client retention (81%, down from 82% yr/yr); (2) a decline in its mid-market (businesses with 50-1,000 employees) payroll sales activity for FY2017 compared to a year ago; (3) increased pricing competition, mostly in the mid-market, and (4) FY2018 Payroll Service revenue growth outlook of +1-2% yr/yr (vs. +3% in FY2017). We view PAYX’s results as a positive for PAYC (Outperform, TP$70) and ULTI (Outperform, TP$260), given our belief that disruptive, best-of-breed SaaS payroll vendors will continue to capture and gain market share of the large outsourced payroll/HCM software market at the expense of incumbent service bureaus, including PAYX, ADP (not covered) and Ceridian (private).
I can see PAYC eating ADP’s lunch. Our company uses ADP. We completed our implementation about a year ago. It went well, but I continue to hear complaints by our HR team about lack of responsiveness from ADP now. They sucked us in with “introductory pricing,” and their service is slacking.
I noticed a PAYC booklet on my HR managers desk. She said that they have been excellent to talk to and that she will be presenting me with a business plan to make a move.
Matt, excuse me for hijacking this thread but ADP and PAYX are two perfect stocks to illustrate the “S” curve.
Peter Lynch loved Automatic Data Processing (ADP) but that was a very long time ago. I always saw Paychex, Inc. (PAYX) as a copycat, but a successful one. Look at the charts:
Look at the beautiful “S” that ends in the year 2000. The natural curve was interrupted by the dot com bubble bursting in 2000 but the stocks essentially flatlined for a decade or more. That is not to say you could not make good money on the recovery, that is not the issue. All I’m doing is to illustrate the “S” curve in action.
So is there a way you can tell when you are at the top of the S curve?
Andy
Only as a good guess. Adoption slows as markets take up a product or service. A rule of thumb is that the top is reached with an 85% market penetration. A chart watcher will start noticing when growth tires and slows. One thing to remember is that none of these ideas can be used as mechanical investing processes. It’s still more art than science.
