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Paychex (Nasdaq:PAYX) just closed the books on the first quarter of its fiscal year. Its flagship payroll services business is hanging in there until the economy or interest rate rises. Its human resource outsourcing business is seeing impressive trends during a difficult economy. Looking forward, the stock has investment appeal, despite more subdued top-line prospects.
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First-Quarter Sales Review
Total revenue improved 4% to $518.3 million. 70% of the top line stemmed from the flagship payroll services, which reported 2% growth. The rest consisted of human resource services that posted a robust 10% jump in sales while the revenue earned on interest on funds held for clients fell by 12%. Paychex management detailed that quarterly trends were above its expectations, as was client retention. It is still struggling to secure new sales, but did see a slight uptick in payroll activity among existing clients and it was able to implement annual price increases.
Profit Recap
Expense growth of 2% lagged the uptick in sales and pushed operating income up by 6% to $202.2 million. Higher investment income also slightly helped send net income up 7% to $131.9 million, or a very healthy 25.4% of sales. Despite slightly higher shares outstanding, earnings grew 6% to 36 cents per diluted share. Of this amount, Paychex paid 31 cents out as a quarterly dividend.
Outlook
For the full year, Paychex expects flat payroll sales, but a 10-13% improvement in human resource segment sales. Analysts currently project full-year sales of $2.06 billion and earnings of $1.36 per share in 2011.
Industry Landscape
Paychex considers Automatic Data Processing (NYSE:ADP) its primary rival in both product segments, given that both are national players. It also competes with the likes of Accenture (NYSE:ACN), as it provides resource outsourcing services, and smaller players in human resources like Hewitt Associates (NYSE:HEW), which is in the process of being acquired by Aon (NYSE:AON).
The Bottom Line
Paychex is primarily a technology firm that provides software and services to help clients pay employees and take care of all the paperwork to handle things such as federal, state, and local tax returns. Its human resource business is similar and helps employers outsource all of their key HR functions to Paychex.
As such, the business requires minimal capital to run and grow. Much of the excess capital generated is returned to investors via dividends. It has been a couple of years since Paychex bought back its stock, but it will likely do so when employment trends improve or interest rates rise and allow it to earn extra from the lag time between when it receives cash from employers and pays it out to its client's employees.
At a forward P/E of just over 18, Paychex is trading at a fair multiple for a buy opportunity. A reasonable valuation and current dividend yield of 4.6% offer two compelling investment merits, though growth going forward is unlikely to be spectacular. This is because of the firm's high market share among smaller businesses and an economic recovery that could take some time after a severe financial crisis. (Find out how you can bypass or defer taxes on thousands of dollars each year. Read Payroll Deductions Pay Off.)
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IN PICTURES: Learn To Invest In 10 Steps
First-Quarter Sales Review
Total revenue improved 4% to $518.3 million. 70% of the top line stemmed from the flagship payroll services, which reported 2% growth. The rest consisted of human resource services that posted a robust 10% jump in sales while the revenue earned on interest on funds held for clients fell by 12%. Paychex management detailed that quarterly trends were above its expectations, as was client retention. It is still struggling to secure new sales, but did see a slight uptick in payroll activity among existing clients and it was able to implement annual price increases.
Profit Recap
Expense growth of 2% lagged the uptick in sales and pushed operating income up by 6% to $202.2 million. Higher investment income also slightly helped send net income up 7% to $131.9 million, or a very healthy 25.4% of sales. Despite slightly higher shares outstanding, earnings grew 6% to 36 cents per diluted share. Of this amount, Paychex paid 31 cents out as a quarterly dividend.
Outlook
For the full year, Paychex expects flat payroll sales, but a 10-13% improvement in human resource segment sales. Analysts currently project full-year sales of $2.06 billion and earnings of $1.36 per share in 2011.
Paychex considers Automatic Data Processing (NYSE:ADP) its primary rival in both product segments, given that both are national players. It also competes with the likes of Accenture (NYSE:ACN), as it provides resource outsourcing services, and smaller players in human resources like Hewitt Associates (NYSE:HEW), which is in the process of being acquired by Aon (NYSE:AON).
The Bottom Line
Paychex is primarily a technology firm that provides software and services to help clients pay employees and take care of all the paperwork to handle things such as federal, state, and local tax returns. Its human resource business is similar and helps employers outsource all of their key HR functions to Paychex.
As such, the business requires minimal capital to run and grow. Much of the excess capital generated is returned to investors via dividends. It has been a couple of years since Paychex bought back its stock, but it will likely do so when employment trends improve or interest rates rise and allow it to earn extra from the lag time between when it receives cash from employers and pays it out to its client's employees.
At a forward P/E of just over 18, Paychex is trading at a fair multiple for a buy opportunity. A reasonable valuation and current dividend yield of 4.6% offer two compelling investment merits, though growth going forward is unlikely to be spectacular. This is because of the firm's high market share among smaller businesses and an economic recovery that could take some time after a severe financial crisis. (Find out how you can bypass or defer taxes on thousands of dollars each year. Read Payroll Deductions Pay Off.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Ryan C. Fuhrmann
Ryan C. Fuhrmann, CFA, has a background in portfolio management, overseeing assets for high-net-worth individuals and covering a broad array of industries from a generalist perspective. An active student of investing, he focuses on communicating his ideas as an investment writer and learning from the financial community. Ryan is also actively involved with the CFA Institute. Feel free to visit his website at www.rationalanalyst.com.
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