Filed Under: , ,
Tickers in this Article: PAYX, GVHY, ADP, SPLS, ODP
Payroll processor Paychex (Nasdaq:PAYX) boasts 18 straight years of record revenues, net income and EPS expansion, according to the company's website. Recent guidance indicates that the upcoming year-end will provide another record in terms of revenue, but the bottom line will contract in the single digits. This isn't that surprising, given that Paychex specializes in serving small businesses that are suffering through a major recession. Despite this, the company remains very appealing for patient investors. Read on to find out why.

IN PICTURES: 10 Ways To Prepare For Nature's Worst

Quarterly Recap
Paychex reported third-quarter results on Wednesday that saw total sales fall 1% to $528.6 million. Core payroll services revenue held up quite nicely and grew 2% to account for 72% of total revenue, "primarily due to price increases and growth in the utilization of ancillary payroll services." The company's human resources administration and compliance service, which clients use to outsource human resources and 401(k) management functions, competes with the likes of Hewitt Associates (NYSE:HEW) and Gevity HR (Nasdaq:GVHR). The sector reported strong growth of 9% to outperform its rivals. The biggest detractor from the top line was a 56% fall in interest that Paychex earns while carrying out its payroll services.

Total expense growth was modest at 3%, but a flight to safety by investors and a subsequent fall in yields for short-term liquid assets pushed Paychex's investment income down 70%. Add it all up and diluted earnings fell 8% to 36 cents per share. Management doesn't expect the full year to improve much, and is currently projecting a 5-7% fall in net income. It does expect 2% sales growth on a double-digit increase in the human resources segment.

The Bottom Line
Paychex may not be growing much in the current difficult economic environment, but remains impressively profitable. Quarterly net margins were 24.7%, which means nearly one-quarter of sales fall to the bottom line that management uses to pay a current 5.1% dividend yield and buy back stock. It generates so much capital that it has returned 80% of net income to shareholders as a dividend payout so far this year.

Once the economy recovers, growth should return to Paychex. Annual sales and earnings growth has averaged in the double digits over the past five years, which bests archrival ADP (NYSE:ADP). ADP has only averaged low-single-digit growth and recently lowered its earnings guidance. (Explore the controversies surrounding companies commenting on their forward-looking guidance in Can Earnings Guidance Accurately Predict The Future?)

comments powered by Disqus

Trading Center