Earnings Preview: Paychex Inc. - Analyst Blog
September 26 2011 - 9:15AM
Zacks
Paychex Inc.
(PAYX) is scheduled to announce its first quarter fiscal 2012
results on September 27, and we notice no movement in analyst
estimates at this point.
Fourth Quarter
Overview
Paychex delivered mediocre fourth
quarter 2011 results, with earnings of 33 cents per share just
matching the Zacks Consensus Estimate. The quarter’s results
indicated an improving client retention rate and higher checks per
client, but lower sale of new units remained an overhang.
Paychex’ fourth quarter revenues
grew 5.3% year over year backed by increases of 8.7% in Human
Resources Services revenue and 4.6% in the Payroll Service revenue.
But the reported revenue was below the Zacks Consensus
Estimate.
Total operating costs increased
5.4% year over year, reflecting higher acquisition and training
costs, partially offset by a higher utilization rate and lower
headcount. Operating margin remained flat year over year at
35.0%.
Guidance
For fiscal 2012, Paychex expects a
5–7% increase in Payroll Service revenues compared to the year-ago
quarter. Human Resource Services revenues are expected to increase
in the range of 12.0% to 15.0%.
Total service revenue is likely to
grow in the range of 7% to 9%. The company expects a 12–14% decline
in interest on funds held for clients and a roughly 2% increase in
net investment income.
Interest on funds held for clients
and investment income for fiscal 2012 are expected to be impacted
by the low interest rate environment. However, investment of cash
generated from operations is expected to continue, so investment
income will increase.
Net operating income is expected in
the range of 35–36% of total service revenue. The effective tax
rate is expected to be roughly 35% and net margin is projected at
between 5% and 7%.
The guidance for fiscal 2012
includes anticipated results from Paychex’s acquisition of
SurePayroll Inc. and its ePlan Services. The acquisition is
expected to have approximately a 2% positive impact on revenue,
nonetheless resulting in earnings dilution of around 1 cent per
share on a GAAP basis due to amortization on acquired intangible
assets and some one-time acquisition costs.
Agreement of
Analysts
Out of the 15 analysts providing
estimates for the first quarter, none made any revision in the last
thirty days. However, out of the 18 analysts providing estimates
for fiscal 2012, one raised the estimate in the last 7 days while
another reduced the estimate in the last 30 days.
The nominal change to first quarter
estimates point to the fact that there was no major catalyst during
the quarter that could drive results. Consequently, the analysts
are sticking to their estimates projected post fourth quarter
earnings.
But some analysts prefer to remain
cautious based on management’s commentary of not seeing a
significant sign of improvement in new small-business formation.
Moreover, a few analysts think that aggressive pricing from
Automated Data Processing Inc. (ADP) is stealing
away customers from Paychex.
The time difference between when
the company receives payroll from its clients and pays it out to
employees typically earns some interest for Paychex. Now, with the
government contemplating to keep interest rates low, this quick
income stream of the company will also be restricted.
Magnitude of Estimate
Revisions
There was no change to the Zacks
Consensus Estimate for the first quarter or fiscal 2012 over the
past 30 days. However, the Zacks Consensus Estimate for fiscal 2012
went down a penny to $1.50 in the past ninety days.
Recommendation
The market is losing confidence on
the growth of the small and medium business (SMB) group. The sector
is being hit hard by lackluster demand that comes on the heels of
high unemployment and inflation rates. Outsourcing companies like
Paychex are highly dependent on the performance of the SMB sector
and this is the reason that the company may be not see much revenue
growth.
However, we remain positive on
management’s positive commentary regarding continued investments in
product development and synergies from the recent acquisition. We
also believe that cost control will remain a catalyst for Paychex,
going forward.
On the other hand, we are slightly
concerned about the growing competition in the outsourcing space
from big players such as Automated Data Processing Inc. and
Administaff Inc., as well as limited margin expansion due to
continuous investments in diverse fields.
Paychex has a Zacks # 3 Rank,
implying a short-term Hold recommendation.
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