Paychex Rolls Out New Solution - Analyst Blog - Automatic Data Processing (NASDAQ:ADP)

New York-based outsourcing service provider, Paychex Inc. (PAYX) announced the rollout of a new solution for filling up form 5500. The solution will come in handy for the many organizations offering retirement schemes.

Form 5500 is an annual reporting requirement prescribed under the Internal Revenue Code (IRC) and Employee Retirement Income Security Act (ERISA) for employers offering employee pension benefit plans. On June 15, the Department of Labor (DOL) announced that employers should fill Form 5500 electronically beginning with the 2009 plan year.

With the help of Paychex's solution, organizations will be able to fill, review, sign as well as submit the form electronically to the DOL. The entire procedure will be performed through Paychex's online retirement services website, but only after obtaining the required Electronic User ID and Signature PIN.

In addition to filling Form 5500, Paychex will offer some extra services to its clients. These services will allow employers or organizations to view and update/change the benefit plans as well as update nomination-related information, determine employees' eligibility for enrollment, fetch ancillary help for making the plan operational and assess the key aspects of the plan through ready answers to various questions.

The Philadelphia-based auto body centre, Collision Care Services has already vouched for the efficacy of Paychex's solution. Collision Care could amend their forms and file them timely with the DOL after using it.

Compliance procedures in filling up forms can be long and tricky. Since Paychex aims at making them simpler, we believe more organizations will come forward to subscribe for the company's online services.

Moreover, we believe the success of this solution could generate streams of revenue for Paychex's Human Resource Services segment. These, in turn, will likely help to achieve the segment's 10%–13% year-over-year growth target for the first quarter of 2011.

On the flip side, we remain concerned about the decreasing customer count at Paychex and the challenging conditions in the U.S. small business segment due to high retrenchment rate and constrained credit conditions.

Growing competition in the outsourcing space from big players such as Automated Data Processing Inc. (ADP) and Administaff Inc. (ASF), limited margin expansion due to continued investments in diverse fields and low interest rates are also causes for concern.

We currently have a short-term Sell recommendation on Paychex, as indicated by the Zacks #4 Rank.

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