How Thinking Small Makes You Big Profits

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Small business owners believe (59%) that running a small business is decidedly more difficult than five years ago and most cite the economy (can't help you much there) and the challenges of technology.

This finding comes from a study conducted by Constant Contact (NASDAQ: CTCT), a company that specializes in email and social media marketing, event marketing, and online surveys for small business. The study also reported 84% of those surveyed are using more online marketing tools than five years ago.

Small business has been in focus as this is Small Business Week, June 16-22. Big companies like Goldman Sachs, IBM, and Home Depot have initiatives that help cherry-picked small businesses but it's the day-to-day where small business needs a hand with their three legged stool of marketing, accounts, and workforce.

Marketing and Manic Monday

For a small business every day is Manic Monday...there is never a " Wish it was Sunday, Cause that's my fun day, my I don't have to run day." Getting customers in the door is their biggest challenge and e-mail and social media marketing is key—98% now use e-mail marketing and 87% use social media marketing.

Helping small business is big business. After Salesforce.com agreed in June to buy Exact Target. Constant Contact and Responsys are surmised to be the next target of a buyout offer. Wells Fargo analyst Jason Maynard advised clients Constant Contact is a strategic acquisition for a big buyer. Exact Target which helps Fortune 500 and small businesses with cloud based marketing solutions and is a direct competitor of Constant Contact had a trailing EBITDA of -$591,000 yet got a 53% premium; compare that to Constant Contact with a trailing EBITDA of $19 million.

Constant Contact is the lowest cost solution for these small businesses. In addition to its marketing services it helps small businesspeople with boot camp classes on marketing their enterprise. In eighteen years the company has grown to 555,000 customers worldwide. Its corporate governance risk is a fairly low 3.

Constant Contact trades around a 44.40 trailing P/E with a forward P/E of 20.48 and a PEG at 1.03. The company has no debt and cash per share of $3.17.

The small cap stock is down 11.94% over the last year and has a short interest of 17.30% which is decreasing. From its 52 week high of $21.22 last September to a 52 week low of $11.50 this is a volatile stock but the company has a loyal and growing customer base with proven small business need.

<img alt="" src="http://media.ycharts.com/charts/9659398197650ab046465d2d9cd2cc21.png" />

CTCT Total Return Price data by YCharts

A mountain of paperwork

Intuit (NASDAQ: INTU) is another company that increases small business efficiency. Known better for its consume tax software, Intuit also has a thriving small business solution division with QuickBooks, DemandForce, Online Payroll, and other workforce and accounting solutions for small business. The Constant Contact study also reported 27% of the small businesses surveyed are using more automated business solutions.

Its consumer tax segment has been the headache for analysts and investors causing the company to guide lower at its latest earnings release. However, its Financial Solutions and Management Solutions small business division is the growth driver at Intuit.

Its most direct competitor is Paychex (NASDAQ: PAYX) Paychex has more mid-size reach but Intuit offers small businesses more economical solutions and will likely continue to gain share.

This spring Intuit partnered up with LinkedIn to help small business with hiring. Both offered discounts on software and hiring packages. This was a match made in heaven, with LinkedIn as the largest professional social network and Intuit as a leading business and tax software provider.

In a seeming effort to catch up with Intuit, on June 12 Paychex bought HRServices, a software as a service company specializing in social recruitment, tracking and hiring software. Its main product is myStaffing Pro. Paychex paid an undisclosed sum.

Among seven strategic acquisitions in the last few years, Intuit bought Medfusion to woo small business owners with simple low cost solutions to health care management with a tax free debit card, payroll management, and banking services. In 2010 when they bought it with Obamacare looming this couldn't have been more prescient.

National Federation of Independent Business' chief economist William Dunkelberg sees the biggest headwind for small business to be,"... the ACA (Affordable Care Act) is about to grip the entire business community in a morass of new taxes, forms to fill out, fines and higher labor costs," (his emphasis).

Paychex is also offering various services to help employers with the ACA much as Intuit has like their Paychex Benefit Account using a single debit card and Employer Shared Responsibility Service which helps business determine if they are fulfilling ACA regulations.

Intuit also competes with eBay, Google and square in the mobile wallet space. A most promising asset is Intuit's GoPayment, an application for small business mobile payment. Small businesses already in the Intuit ecosystem will likely adopt GoPayment as it syncs with QuickBooks and QuickBooks Point Of Sale. With over 2.8 million small retailers in the US this could be very big for Intuit.

Intuit's CEO Brad Smith was named a Motley Fool CEO of the week last December. It has the lowest corporate governance risk rating of 1 and offers a 1.20% yield at a forward P/E of 16.01 and PEG of 1.35.

Paychex may seem the better buy with its 3.60% yield. It should be noted the payout ratio exceeds 90% and has been a concern since 2010 when the payout ratio first rose above 75%. Compare this to the payout ratio at Intuit at 29%. Paychex has a higher PEG at 2.56 and higher forward P/E at 21.85.

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PAYX Dividend Yield data by YCharts

Open for small business

While all three companies are doing their best for small business I like Paychex the least despite its high yield. The fundamentals are better at Intuit. Don't forget Intuit's admirable CEO, mobile wallet, and prescient acquisitions as well as its partnership with LinkedIn.

Constant Contact is a good speculative play on small business marketing. Between Constant Contact and Intuit a small business should be good to go.

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AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Intuit and Paychex. The Motley Fool owns shares of Intuit. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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