Industry Research Report

8/14/2019 Industry Research Report

1/14

Index

Abstract 2

Construction 3

Broadcasting and cable 4

Real Estate 5

Trucking 6

Commercial Printing 7

Hotel 8

Paper and forest products 9

Dairy Farm 10

Office supplies 11

Insurance 12

Conclusion 13

Contacts:

Junhan Tang

Credit Risk

Representative

[email protected]

(585)3

36-7600 ext: 65384

INDUSTRY REPORTS NOVEMBER 18, 20091

Industry Research

Report

Junhan Tang Credit


2/14

Abstract

Fiscal 2009 was not a normal year for Paychex but then again, 2009 wasnt a normal

year for any company. Like the rest of the world, our company found itself inunprecedented times. The issues having the greatest effect on us the ones that prevented

us from having what we call a traditional Paychex year --came about at the advent of

the poor economy.

2009 has been a tough year, -- our nations economy was the worst it has been since the

Great Depression. And as we know, our business model is highly positively correlated to

the overall economic situation considering the fact that most of our clients are small- to

medium-sized businesses covering various industries. To be more specific, worsening

economic situation has induced high unemployment, which led to fewer paychecks for us

to process. According to our statistics, the number of companies going out of business, orlosing their ability to pay for our services, accounted for a 17% increase in client losses in

the past fiscal year. At the same time, the credit crisis also kept fewer new businesses

from forming.

It is such a critical moment for us and thus, we think it is highly important for Paychex,

Inc. to study the trend of the macro economic situation and keep track of different

industries so that we can better protect the company in the future by minimizing the

operating loss associated with worsening situations in certain industries within certain

geographic areas.

We did research on 30+ industries and finally narrowed down the base to 10 industries

that we think are in serious trouble and at the same time have significant impact on

Paychex, Incs business. The way we adopted to decide the impact of certain industries

on us was finding out how many clients we had in its related industry. And we assign

higher scores to the industries with more clients and vice versa. Then we broke the

industries down by geography if possible to be more specific. Besides, we also take into

consideration of Paychex, Incs nature and we think more-deconsolidated industries have

greater impact on us, so we assign higher weight to these industries. Finally, we

calculated scores for each of the 10 industries on our list by combining the two factors

and in our opinion, the ones with the highest scores require highest attention and viceversa.



3/14

ConstructionGeographic: California, Detroit and NYC

Facts:

Construction of retail and office buildings has nearly ground to a halt in

today's struggling economy.

From 07/ 2008-07/2009, employment in the sector declined by 99,800

jobs, or 12.1 percent, to 727,800 positions

Figure 1

Reasons:

Collapse of the housing market and strict credit standards sharply reduces

the demand for construction.

Forecast:

For the near and mid term, national government investments in

transportation infrastructure such as highways, education facilities,

government offices and health care facilities will offer opportunities to

commercial construction firms. A large portion of national government

stimulus construction spending will be funneled to state and local

projects.

How it affects Paychex:

In combination of our client base as of 08/2009, we can see 6115clients in

Construction related industry, 1086 of them in CA. (Table 1)

14 of them in Detroit (Table 2)

54 of them in NYC (Table 3)

Broadcasting and cable IndustryFacts:

http://www.plunkettresearchonline.com.ezp.lib.rochester.edu/ResearchCenter/Glossary/View.aspx?Industry=19&term=Infrastructurehttp://www.plunkettresearchonline.com.ezp.lib.rochester.edu/ResearchCenter/Glossary/View.aspx?Industry=19&term=Infrastructure


4/14

Trouble in the Broadcasting and Cable

Industry

Many companies have undergone dramatic structural and ownership

changes to address issues mostly stemming from high debt loads.

The unemployment rate climbed to 9.5% in June 2009, the highest since

1983.

11 out of 16 major players had negative ROE.

Reasons:

issued for M&A

Forecast:

In 2010, political revenues will ramp up, but with no Presidential election,

advertising will likely remain well below 2008 levels.

In 2010 and beyond, there might be further consolidation in the

broadcasting industry, as better capitalized companies seek to acquire

assets from their struggling competitors.


In combination of our client base as of 08/2009, we can see 1996 clients in

broadcasting and cable related industry. (Table 4, 5, 6)

Real EstateGeographic: NYC, Washington, California, Detroit, Miami, and Las Vegas

Facts:


Declining advertising marketLarge amounts of bonds issued for M&ANo more cheap & easy financin

Substantially lower revenue

Decrease in Cash Flow

More difficult to make interest payment


5/14

Aggressive

Mortgage

Poor credit, low-income people purchase

home

Declining home

value

Poor-credit buyers have no incentive to keep the

house

Subprime loan set up as Adjustable interest rate

mortgage

Interest payment soon balloons much higher, so buyers cant

affordHomeowners/builders have difficulty selling properties; and they are unable to m

ARMsUnUn

For February, 2009, the Case Shiller Index of home prices in the U.S.

showed that prices in 20 of Americas largest metropolitan areas had

declined an average of 30.7% from their 2006 peak.

An office rental rate has fallen 23% in New York and 11% in Washington

from their 2008 highs.

Las Vegas and Miami are among the hardest hit, with housing price dropsof 29.4% and 26.8% respectively in 2008.

Reasons:

Forecast:

Housing markets in the U.S. will eventually hit bottom and achieve either

growth or some sort of stability. The positive side is low mortgage interest rates, significantly lower

new and existing home prices.

The negative side is high unemployment rates and job insecurity.


In combination of our client base as of 08/2009, We can see 1316 clients

in real estate related industry, 41 in NYC (Table 7)

8 in Washington DC (Table 8)

1 in CA (Table 9)

1 in Detroit (Table 10)

Trucking (aka construction equipment, heavy trucks, and farm machinery)Facts:

The trucking industry has been in a slump since 2006, and those problems

accelerated in 2008.

5% of the commercial trucking fleet is not being used because of

weakened demand.



6/14

Decreasing demand in home

construction

Decreasing demandin automotive

production

Decreasing demand in consumer spending, manufacturing and

shipping

Worse performance in trucking industry in 2008-

2009

Supply

overhang from the overbuying

that

occurred in 2006

A rebound in US economic growth in

2009A more stringent set of US emission standards is scheduled to take effect in

2010.

Boost the demand and sales for 2009 and

2010.

According to the U.S. Department of Labor, nearly 37,000 workers in the

heavy-duty truck manufacturing industry lost their jobs in 2008, up from

31,000 in 2007;

Reasons:

Forecast:



truck related industry. (Table 11)

Commercial PrintingFacts:

The S&P Commercial Printing Index fell 61.5% in 2008, versus a 38.2%

decrease for the S&P 1500.

Industry Employment Growth - Bureau of Labor Statistics



7/14

Global economic

crisis

Competition from Internet and new

media

Falling subscription of newspapers, catalogs and other commercial

prints

Reasons:

Forecast:

In the short term, we are concerned that excess industry capacity is likely

to cause price competition and shrink operating margins.

For the long run, we expect continued consolidation in the highly

fragmented commercial print industry aimed at achieving economies of

scale.How it affects Paychex:


commercial printing related industry.(Table 12)

Hotel

Geographic: West coast, California especially. New YorkFacts:

Luxury Hotel Chains Dropping Ratings to Conserve Cash.

1000 plus non-casino hotels have defaulted on $16.8 billion in loans

around the country.

Smaller California towns that rely heavily on tourism also have seen

established hotels failure.



8/14

Decline in room

demand

Increase in supply of

rooms

New hotels that companies planned and built while times looked

good

Decline in room

occupancy

Average price for a Manhattan hotel room now is about $200 a night,

down almost one-third since last year.

Reasons:

Forecast:

We believe the ease on gas price and economy may increase the needs for

both leisure and business travelling, however, the industry fundamentals

on a global basis should remain weak by historical standards for at leastone year or two.


In combination of our client base as of 08/2009, We can see 463 clients in

hotel related industry, 52 in CA (Table 13)

17 in NYC (Table 14)


2008s high gasoline pricesSlowing economy


9/14

Paper and forest products IndustryFacts:

Employment levels have been in a steady downward trend since 2000because of contraction in the paper and paper products segment.

In newsprint, demand in North America has been declining steadily for

several years. As Smurfit-Stone Container Corp. filed for Chapter 11 bankruptcy

protection, it became the largest bankruptcy filing in the history of theNorth American paper and forest products industry.

Reasons:

Electronic substitution, such as email, online bill paying, internet

advertising and electronic readers appear to be having a negative impact

on demand for several types of paper.

The severe contraction in the housing market is having a major impact on

demand and pricing in the wood products sector.

Forecast:

In the short term, pricing levels in many grades will continue to trenddown after a long upward move due to expected declines in economic

activity and employment levels. However, we expect manufacturers to

continue to exhibit supply discipline with temporary, or possibly

permanent, production cutbacks.

In the long term, the promising future in bio-fuels could boost demand for

forest products.



commercial printing related industry, 71 in wood product(Table 15)

386 in paper product(Table 16)

Dairy FarmGeographic: Western States, Wisconsin



10/14

Facts: Since January 2008 milk prices have fallen by nearly half, from $20.50 per

hundredweight (45kg) to $11.40 this June

Reasons:



11/14

Global demand has plummeted; milk intended for export has spilled back onto the do

market

Historically low

price

Cost of production remains relatively

high.

Worsening profit in dairy

farms

Forecast:

Dairy farms are expected to recover some in 2010 as the economy

recovers, but it will depend on the general economy recovering, in

combination of a reduction in supply and lower petroleum prices.



Dairy related industry (Table 14), 4 of them in WI (Table 17).

19 of them in CA(Table 18).

Office supplies Facts:

Major office supply retailers struggle and 7 out of 8 major suppliers had

negative ROE for last fiscal year.



12/14

Description MarketCap

ROE % Div. Yield %

Sector:Consumer Goods 2138.1B 16.89 2.47

Industry:Office Supplies(More Info)

1.9B 0.00 4.65

ACCO Brands Corporation(ABD)

305.5M -249.83 NA

Acme United Corp. (ACU) 29.2M 13.79 2.30

AT Cross Co. (ATX) 71.3M -2.87 0.00

Ennis Inc. (EBF) 352.8M -11.38 4.50

Franklin Covey Co. (FC) 93.9M -4.48 NA

OfficeMax Inc. (OMX) 862.8M -96.18 5.20

Standard Register Co. (SR) 124.6M -5.94 4.50

Tufco Technologies Inc.

(TFCO) 13.9M -1.70NA

Reasons:

Slowdown in spending by consumers and small businesses amid the

struggling economic situation significantly reduces the demand for

renewing office supplys.

Forecast:

In the short term, we expect gradual improvement in demand in 2010 with

the economy getting better. Besides, with the increasing equipment

replacement needs and stabilizing business activities, the demand for

office supplies will also pick up. For Longer term, we look for demand to come from improving global

economies and new products focused on cost efficiencies, but we also see

aggressive competition and price erosion.



office supply related industry (Table 19)

Insurance Industry (especially life insurance companies) Facts:

The year 2008 has proven to be one of the most difficult in recent memory

for the life insurance industry.

11 out of 14 insurance companies S&P covers reported 4th quarter earnings

below its already sharply downward-revised expect.

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13/14

S&P Life & Health Insurance index has declined nearly 50% in 2008 and

45% year-to-date through March 31, 2009.

Reasons:

Investment loss :

Holding significant percentage of long maturity financial assets

such as Mortgage-based securities, the subprime crisis and stockmarket meltdown had a significant effect on profits and assets at

life insurance companies in particular.

Insurance companies also hold immense investments in real estate,

hedge funds, private equity, venture capital funds and other types

of investments. The global financial meltdown hurt all of these

asset classes and thus hit the capital base of the insurance industry

in a hard way.

Operation loss:

Business bankruptcies, unemployment and cost-cutting by both

businesses and consumers hurt insurance sales. Forecast:

For the near term, the operating environment is still difficult Equity markets decline year to date and the possibility of lower-

than-anticipated returns from alternative investments shouldcontinue to put pressure on fee income from selling equity-linkedproducts as well as on the investment income in 2009.

Furthermore, the low interest rate environment as well as highcash and liquidity positions will curtail investment income,weighing on top-line growth.

For the long term, consolidation in the life insurance industry will

continue to be driven by the need to offset slowing revenue growth,compete in a converging financial services marketplace, cut costs, andachieve economies of scale.



insurance related industry, 13 in life insurance (Table 20)

18 in health insurance (Table 21)

Conclusion:

As we can see, among all the industries on the list, Construction industry affectsPaychex, Inc. the most in terms of the number of clients in the related industry while

Insurance industry has the least impact on Paychex, Inc.

However, considering the nature of Paychex, Incs business, 98% of our clients fall into

the small- and medium-sized business category, so we may want to focus more on the



14/14

highly deconsolidated industry, in which the industry is less dominated by conglomerated

players so that smaller players have more impact in the industry. So among all the 10

industries on the list, Trucking, Commercial Printing, Paper and forest products as well as

Dairy farm fit this deconsolidated industry profile while Broadcasting and cable, Hotel,

Insurance industries are more consolidated. This indicates that our clients in these

consolidated industries may deviate from the core business and are more related to the

side business relating to the industries.

So combing the general industry analysis and Paychex, Inc.s business model, we assign

different scores and weights to each industry. For the industry with most clients, aka the

Construction industry, we assign a score of 10. And for the industry with least clients, aka

the Insurance industry, we assign a score of 1. Besides, for the more deconsolidated

industries, we will multiple the assigned score with a multiplier of 1.5. And for the most

consolidated industries, we will multiple the assigned score with a multiplier of 0.5 and

the industries left will remain the score unchanged. So the industry with the biggest finalscore will be of our most concern and vice versa.

IndustryScore

Multiplier Final Score Rank

Construction 10 1.0 10.0 2

Broadcasting and cable 9 0.5 4.5 6

Real Estate 8 1.0 8.0 4

Trucking 7 1.5 10.5 1

Commercial Printing 6 1.5 9.0 3Hotel 5 0.5 2.5 8

Paper and forest products 4 1.5 6.0 5

Dairy Farm 3 1.5 4.5 6

Office supplies 2 1.0 2.0 9

Insurance 1 0.5 0.5 10In conclusion, we think the Trucking, Construction and Commercial Printing industries

are the top 3 industries among the 10 that Paychex, Inc. should keep an eye on for the

next year or two.


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