Paychex Keeps Steady

By Sham Gad | March 28, 2011 AAA

Paychex (Nasdaq:PAYX) continued to ride the wave of a rebounding economy during its fiscal third quarter. Total revenues were up 5% to $520 million while net income was up 17% to $131 million. Diluted EPS was up 17% to 36 cents per share. Paychex CEO Martin Mucci cited that the number of checks per Paychex client continued to improve in the third quarter.

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A Barometer on the Economy
Paychex, Inc. is a leading provider of payroll, human resource, and benefits outsourcing solutions for small- to medium-sized businesses. The company offers complete payroll solutions, human resource services including 401(k)-plan record-keeping, and a variety of business insurance products, including group health and workers' compensation. Paychex serves approximately 536,000 payroll clients nationwide. Seeing as how small businesses make up the lifeblood of the U.S. economy, Paychex's business can serve as a barometer of U.S. economic health.

The big player in the industry - Automatic Data Processing (NYSE:ADP) with a market cap of $25 billion, $9 billion in revenues, and over 550 thousand clients - is also a good measure of the pulse of the U.S. economy. Businesses such as ADP, PAYX, and to a lesser extent, small-cap Insperity (NYSE:NSP), prosper when small businesses are hiring, providing benefits, and growing. When they do well, it's a sign that small businesses are gaining more confidence. (For related reading, see Financial Services That Buffett Could Love.)

The Bottom Line
Just because the economy seems to be heading in the right direction, doesn't mean it's smooth sailing for companies like Paychex. After all, Wal-Mart (NYSE:WMT), as the largest retailer on the planet, is a great barometer for the economy. Yet shares in the discount retailer have lagged behind the market rally. In fact, while these companies benefit from an improving economy, they are also at the mercy of the economy. Any sudden shift in economic conditions could lead to a difficult operating environment for Paychex. For example, the current low interest environment is affecting the company's investment income. The company noted that interest on funds held for clients and investment income are declining due to the low-interest-rate environment. As investments in the company's long-term portfolio mature, they are having to reinvest the proceeds at lower average interest rates. Of course, other economic variables like unemployment rate, inflation and consumer confidence also play a role in the growth of a company like Paychex.

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