Earnings Preview: Paychex Inc.

Paychex Inc. (PAYX - Snapshot Report), specializing in payment processing services, is scheduled to announce its first quarter fiscal 2013 results on September 24 after the closing bell, and we notice limited movement in estimates at this point.

Fourth Quarter Overview

Paychex delivered modest fourth quarter 2012 results, with earnings of 34 cents per share, in line with the Zacks Consensus Estimate. The 3.6% increase from the year-ago quarter was on account of revenue improvement across all its segments, partially offset by low new business generation.

Revenues grew 5.5% year over year, backed by increases of 11.5% in Human Resource Service revenue and 3.5% in Payroll Service revenue.

Despite higher operating expenses, operating margin increased 70 basis points year over year owing to favorable mix.

Outlook

Paychex appeared to be a bit cautious as far as its fiscal 2013 guidance is concerned. Keeping in view the current market and economic condition, Paychex believes that checks per client will moderate through fiscal 2013. But this will be partially offset by modest client growth and improved revenue per check. Also, Human Resources organic revenue growth will follow the historical trend.

Agreement of Analysts

Out of the 17 and 23 analysts providing estimates for the first quarter and fiscal 2013, respectively, we noticed absolutely no revision in the past 30 days. No estimate revisions were either noticed for fiscal 2014. The limited movement since Paychex reported fourth quarter results suggests that there is a lack of driving events.

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

However, some analysts are positive about Paychex’s efforts to be technologically advanced by launching mobile apps for Apple Inc.’s (AAPL) iPad and Android tablets, which allows its users to use the apps whether they are using a personal computer or laptop. In addition, Paychex launched smartphone applications targeting both employers and employees who are always on the move.

Magnitude of Estimate Revisions

There was no change in the Zacks Consensus Estimate for the first quarter and fiscal 2013 in the past 30 days. But the estimates moved down by 2 cents each to 41 cents and $1.61 for the first quarter and fiscal 2013, respectively in the past 90 days. The estimate for fiscal 2014 plunged 5 cents to $1.71 in the past 90 days.

Recommendation

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

But lingering unemployment situation, strict interest rates and stiff competition from Automated Data Processing and Insperity (NSP - Snapshot Report), keep us concerned. However, Paychex’ zero European exposure will be beneficial for the company.

Paychex has a Zacks # 3 Rank, implying a short-term Hold rating.