Zacks_Analysts' Blog : Earnings Preview: Paychex Inc. - Analyst Blog

Paychex Inc. (PAYX) is scheduled to announce its second quarter fiscal 2012 results on December 20, and we notice no movement in analyst estimates at this point.

First Quarter Overview

Paychex delivered decent first quarter 2011 results, with earnings of 41 cents per share beating the Zacks Consensus Estimate by 3 cents. 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’ first quarter revenues grew 8.6% year over year, backed by increases of 16.6% in Human Resource Service revenue and 6.0% in Payroll Service revenue.

A modest revenue growth and better cost management led to operating margin expansion of 340 basis points year over year. Nevertheless, Paychex seemed to be a bit cautious about the fiscal 2012 guidance.

Keeping in view the current market and economic condition, Paychex believes that checks per client will moderate through fiscal 2012, impacting quarterly comparisons for both Payroll Service and Human Resource Service revenues.

Moreover, Paychex believes that the favorability in expenses realized in the first quarter may not be realized throughout fiscal 2012 due to the planned investments in its business.

For more details of first quarter earnings, please visit: Cheerful First Quarter for Paychex

Agreement of Analysts

Out of the 18 and 20 analysts providing estimates for the second quarter and fiscal 2012, respectively, none made any revision in the last thirty days. Also, no change was noticed in the estimates provided for fiscal 2013.

But some analysts prefer to remain cautious based on management’s commentary regarding the sluggishness in new small-business formation. Moreover, a few analysts think that aggressive pricing from Automated Data Processing Inc. (ADP) is stealing customers away from Paychex.

The time difference between when the company receives payments from its clients and pays it out to employees typically earns some interest for Paychex. Now, with the government contemplating lower interest rates, 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 second quarter or fiscal 2012 over the past 30 days. However, the Zacks Consensus Estimate for fiscal 2012 inched up a penny to $1.51 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 why the company may not see much revenue growth.

However, we are encouraged by management’s positive commentary regarding continued investments in product development and synergies from the recent acquisition. We also believe that cost control will play an important role for Paychex, going forward.

Though new business wins in the SMB sector will remain a constant worry, we believe that Paychex can benefit from the improvement in the U.S. employment situation. Hence, considering the situation and keeping in mind Paychex’ consistency in delivering impressive results and zero European exposure, we expect a constructive quarter ahead.

Paychex has a Zacks # 2 Rank, implying a short-term Buy recommendation.