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Guggenheim Sees More Consolidation Ahead In The PEO Space

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Guggenheim Sees More Consolidation Ahead In The PEO Space
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Guggenheim analyst Nandan Amladi recently took a deep dive into the Professional Employer Organizations, or PEO, market and found that the growth trajectory for PEOs will likely slow in 2019 and the next phase of the industry will likely be consolidation. Amladi said there will still be plenty of need for PEOs in the future, however, as health insurance remains a major pain for U.S. small businesses.

PEO customers are typically small businesses with between 10 and 100 customers. These businesses turn to PEOs to help them manage human resources, compliance, regulatory requirements and employee benefits. Healthcare has been a shot in the arm for the PEO industry in the past several years.

Complexity On The Rise

“A key driver of growth for this segment and the success of the ‘co-employment’ model has been PEOs’ ability to aggregate the purchase of health insurance, workers’ compensation and other benefits, providing their small-enterprise customers with lower rates and breadth of coverage that they might otherwise not have access to,” Amladi wrote in a Monday note. The ACA has also been one of many pieces of legislation that has dramatically increased the complexity of federal, state and local regulations in recent years.

He said the recent $1.2 billion buyout of Oasis Outsourcing by PEO Paychex, Inc. (NASDAQ: PAYX) is a sign the industry is entering a consolidation phase, and more deals are likely on the horizon.

How To Play It

Today, the top five U.S. PEOs hold just under half the industry market share, but Amladi expects that number to grow over the next several years.

The two largest PEOs by market share are Paychex (11 percent share following the Oasis acquisition) and Automatic Data Processing (NASDAQ: ADP) (14 percent market share). For now, Amladi prefers ADP as an investment over Paychex given the execution risk associated with the large Oasis deal.

Guggenheim has a Buy rating and $175 price target for ADP and a Neutral rating and $75 target for Paychex stock.

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Latest Ratings for PAYX

DateFirmActionFromTo
Jan 2019Bank of AmericaUpgradesUnderperformNeutral
Nov 2018BarclaysInitiates Coverage OnEqual-Weight
Oct 2018Morgan StanleyMaintainsEqual-WeightEqual-Weight

View More Analyst Ratings for PAYX
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Posted-In: Guggenheim Nandan AmladiAnalyst Color Analyst Ratings Best of Benzinga

 

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