More Pay Wanted

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

The leading U.S. payroll processing company Paychex (NASDAQ: PAYX) announced its most recent quarter’s earnings last week on Dec. 21, 2012. Though the returns per share matched expectations, revenue rose very marginally above expectations.

Numbers Deal

Paychex announced its earnings per share for the most recent quarter as $0.41, which matched expectations and was $0.02 EPS in the same quarter last year. Net income for the period also grew to $147.9 million, from $140.4 million in the same quarter a year earlier, and an increase of 5.3% from the earlier quarter of the same fiscal year. Earnings for the recent quarter rose above expectations, but the rise was very marginal. The earnings figure for the recent quarter is $559.4 million, while the expectations were $557.7 million. The revenue for the same period last year was $535.0 million, and the present revenue is 4.6% higher than the quarter earlier. The main reason for such a slow growth can be the recession that has hit the economy hard.

A Deep Insight

Paychex and its subsidiaries provide payroll, human resource, and benefits outsourcing solutions for small to medium sized businesses. The company has widespread business all over the United States and Germany.

AMartin Mucci, President and Chief Executive Officer, commented on the recent earnings report, saying,

We made solid progress in the second quarter. While payroll services revenue grew modestly at 1.4%, impacted by client disruptions from Hurricane Sandy, Human Resource Services revenue grew at a double-digit rate as we continue to experience success in selling value-added solutions to our clients. Checks per payroll increased 1.2% for the quarter over the previous year. We are seeing good results from our selling efforts in the small-business market and are well-positioned for our peak selling season. In addition, our client retention levels remain near historic high rates generated by our employees’ commitment to client satisfaction. During the quarter, we introduced our industry-leading online client report center and acquired Expense Wire, an online expense management solution for our mid-market clients.

Although the company’s expenses rose 4% compared with same period last year, this is being offset by an increase in productivity. Also keeping in view the current market and economic scenario, the company believes that checks per client will be moderate for fiscal 2013. This, however, could be offset by modest client growth and improved revenue per check. Payroll Services revenue might show a marginal growth of 2%-3% as compared to last year, but Human Resource Services revenue will be on a high nearly 9%-11% as compared to last year.

Others in Line

The company faces direct competition from companies like Automatic Data Processing (NASDAQ: ADP) and Insperity (NYSE: NSP).

Automatic Data Processing (ADP) is the largest payroll processing company in U.S. The company reported its earning per share as $0.62, which is high compared to Paychex. Another reason for Paychex to worry could be the introduction of new products like Vantage, RUN, and Workforce NOW by Automatic Data Processing. The company is one of the four companies to have a AAA rating from Moody’s and S&P, and thus has huge borrowing power and scope for expansion.

However, a strong area for Paychex to compete can be client retention. ADP has shown a decline of 40 basis points in client retention, while Paychex is still maintaining historic rates in client retention. ADP can procure huge funds for expansion, however, the company failed to meet expectations.

Insperity is another leader in providing human resource and payroll services in America. The company has its forte in its diversified range of services, such as Human Capital Management, Performance Management, and Recruitment.

However, Insperity recently introduced its “Dutch Auction” and many of the statements mentioned in the offer document are “Forward Looking,” and thus based on estimations, predictions, assumptions or beliefs, and hence may not be proved correct during the current dynamic economic conditions. So, Paychex can withstand this completion by providing investors and customers with more facts and reality.

Final Words

With modest results in the recent quarter and management’s commitment towards product development and building sales force to support revenue growth, earnings are likely to rebound for Paychex.  That's why I'd suggest Paychex as a buy at this time.  

swatikhanna has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Automatic Data Processing and Paychex. 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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