ADP Automatic Data Processing Inc

Shares of Paychex Inc. (PAYX) reached a new 52-week high of $36.16 on Thursday, Apr 11, 2013, following decent third-quarter 2013 results announced on Mar 27, an improving job market, improvement in hiring activities and better visibility for revenues per check.

The closing price of this payroll service provider on Apr 12, 2013 was $36.14, representing a decent one-year return of about 16.8% and year-to-date return of about 13.5%. Average volume of shares traded over the last three months stand at approximately 2759K.

Paychex delivered a positive earnings surprise in the last quarter with an average beat of 2.5% for the past four quarters. This Zacks Rank #3 (Hold) company has a market cap of $13.2 billion and a long-term expected earnings growth rate of 9.2%.

Decent Third Quarter Results

Paychex reported earnings of 40 cents per share, beating the Zacks Consensus Estimate by a penny and the year-ago level by 6.3%.

Revenues of $593.3 million grew 4.2% year over year and were slightly above the Zacks Consensus Estimate. The revenue growth was mainly due to higher checks per payroll and revenues per check, client retention and client growth. Revenues from the Payroll Service segment increased 1.9% year over year, while Human Resource Services segment revenues grew 9.7% from the prior-year quarter.

Operating margin improved 60 basis points to 43.0% buoyed by modest revenue growth, better cost management and capacity utilization.

For fiscal 2013, Paychex believes that Payroll Services revenue growth will be supported by modest growth in client base and improved revenue per check. Human Resources organic revenue growth is expected to follow the historical trend. Paychex will continue to invest heavily on product development.

Estimate Revision

Following the third-quarter results, the Zacks Consensus Estimate for 2013 remained flat at $1.60. However, the estimate for 2014 was up by a penny to $1.71, supported by 6 upward estimate revisions in the past 30 days. One estimate each was revised downward for 2013 and 2014 over the past 30 days.

Conclusion

We believe that Paychex’ stock price will go up as employment in the small and medium business (SMB) space is improving. A report published by Automatic Data Processing Inc. (ADP) indicates a likely momentum in the SMB market. Also, a survey conducted by SurePayroll Inc. (acquired by Paychex in Feb 2011) shows that roughly 50.0% of the SMBs are going to invest in hiring, marketing and technology. This raises the chance of higher revenues per checks and checks per payroll.

We are also encouraged by management’s commentary regarding continued investments in product development and focus toward building sales force to support revenue growth.

However, strict interest rates and stiff competition from ADP and Insperity keep us concerned. However, Paychex’ zero European exposure and growing customer base will be beneficial for the company.

Other Stocks to Consider

Similar stocks that are currently performing well and have a solid visibility include StarTek Inc. (SRT) with a Zacks Rank #1 (Strong Buy) and Portfolio Recovery Associates Inc. (PRAA) with a Zacks Rank #2 (Buy).

 
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