Tickers in this Article: PAYX, ADP, ECL, RHI, MAN
There are plenty of ways in which the U.S. economy is stronger now than it was a year ago, but that does not mean that current conditions make for a rollicking good time. In particular, companies are not yet hiring in a big way, and that is keeping a lid on the recovery of payroll and HR outsourcer Paychex (Nasdaq:PAYX).

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The Quarter That Was
Paychex's fiscal first quarter seems to fit the overall sense of the economy - slight improvement here and there, but nothing close to enough strength to lift the overall sense of gloom (or at least deep concern). Revenue was up 4% (and ahead of expectations), as payroll service revenue rose almost 2% and human resources services-related revenue rose more than 10%.

One ongoing source of weakness is the revenue that the company generates from its float - interest on funds held for clients dropped about 12% this quarter as low rates continue to clobber this high-margin revenue line.

Other details of Paychex's performance were a bit more encouraging. Checks per client rose 1.2%, marking a steady sequential improvement for four quarters going back to late 2009. Client losses were also better (down 12%), so the company is managing to see a slow recovery in volume despite some price increases. Expense control was also solid, as the company saw 7% operating income growth and a nearly 2% improvement in operating margin.

The Road Ahead
Eventually conditions will improve for small businesses in the U.S., and Paychex should be able to get back to double-digit growth when that happens. "When" and "how" are still significant questions, though. Credit availability may be improving incrementally, but there just has not been any significant boost in hiring or new business formation - both of which are important to Paychex in growing their business. (For more, see Get Paid To Wait By Paychex.)

Apart from that, the company still has a void at the top. The founder of the company, Thomas Golisano, is filling that role for now, but the company almost certainly wants to find a permanent CEO. Although this uncertainty is a problem for many institutional investors, individual investors perhaps do not need to be all that worried - Golisano is more than good enough as a temporary fix and it seems highly doubtful that the company will pick a poor candidate. What that means is this is one of those short-term problems that can give long-term investors a window of opportunity.

The Bottom Line
Given that larger businesses are fairing a bit better and the relative valuation is lower, Automatic Data Processing (NYSE:ADP) is probably worth a look as well, though Paychex would seem to have more upside potential in a recovery. Likewise, investors not willing to wait on improved employment could consider an idea like Ecolab (NYSE:ECL) that has a somewhat more consistent business through good and bad times.

Of course, Paychex is not the only company leveraged to an economic recovery - when hiring resumes, it will likely help companies like Manpower (NYSE:MAN) and Robert Half (NYSE:RHI) as well. Nevertheless, Paychex is a proven performer and a leader in its market. On top of that, Paychex is one of the few companies that should benefit from the seemingly inevitable one-two punch of higher future employment and higher future interest rates. For patient investors, then, Paychex could be an idea worth a closer look today. (For related reading, see Cintas Not Scintillating.)

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