By the Trefis Team

Paychex, Inc. (NASDAQ: PAYX), which competes with Automatic Data Processing (NASDAQ: ADP) provides payroll processing and other HR services related to insurance, retirement and health benefits.  Compared to its competitor ADP, a significant percentage of Paychex’s client base consists of small and medium sized businesses (fewer than 50 employees).

Payroll processing is the most important division for Paychex, constituting 68% of the Trefis price estimate of $28 for Paychex’s stock.  Paychex continues to suffer from declining payroll revenues mainly attributable to ongoing weak macroeconomic conditions in the US which is causing a decline in the number of Paychex payroll clients.

 Recent Decline in Payroll Revenues. Paychex’s payroll revenues for Q3 of 2010 registered a 6% decline over the same period last year due to a decline in its client base arising from relatively high unemployment rate, continuing job losses and fewer new business originations compared to pre-recessionary times.

Paychex’s Payroll Clients Expected to Decline in 2010. Paychex reported that its total client base decreased by 2.1% from May 2009 to March 2010, attributable to the following factors: first, Paychex is finding it tough to add new clients at historical rates because of the decline in the rate of new business formations and fewer companies outsourcing their payroll processing. Paychex’s new client  base decreased 6% in the first three quarters of 2010 compared its client base over the same period in 2009. Secondly, payroll processing companies like Paychex lose clients when businesses either fail or they move to competitors (like ADP).  In 2009, Paychex’s client loss was around 23%, much higher than historical levels of 19-20%.

Though the client loss rate improved marginally in the first three quarters of 2010, it is still higher than historical averages. We expect this rate to continue for the remainder of 2010 as well.

We have decreased our forecast for the number of Paychex payroll clients to 546,000 for 2010 from our previous estimate of 554,000.  However, we expect Paychex’s client base to rise in the future with expected economic recovery and improvement in employment conditions.

For additional analysis and forecasts, visit Trefis.com.

Led by MIT engineers and former Wall Street professionals, the Trefis team builds a model for each company’s stock price based on the relative importance of products that comprise a company’s stock price.

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