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Paychex' 4Q Earnings: A Beat or a Miss?

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Paychex Inc. (PAYX - Free Report) is set to report fourth quarter 2013 results on Jun 27. Last quarter, it posted a 2.56% positive surprise. Let’s see how things are shaping up for this quarter.

Growth Factors this Past Quarter

Paychex’ third quarter revenues grew 4.2% year over year on moderate growth of checks per payroll and revenues per check and client growth in HR Services segment, which was offset by discounting and lower contribution from professional employer organization.

Operating margin improved as a result of better cost management and capacity utilization.

Paychex believes that Payroll Services revenue growth will be supported by modest growth in client base and improved revenue per check.

Earnings Whispers?

There are indications that small and medium businesses (SMBs) are performing better, given the gradual economic recovery. As per financial analysis firm Sageworks, total revenue at SMBs continued to increase in April and May. But the analysis also shows that recruitment at SMB firms is on the decline as they manage to execute effectively despite limited employee strength.

Lower recruitment translates into lesser number of checks per payroll, which affects payroll solutions providers such as Paychex.

Though lower recruitment could jeopardize Paychex’ fundamentals, we believe the recent acquisition of HR Services Inc. and new product launches would provide some support.

The Zacks Consensus Estimate for the fourth quarter stands at 37 cents while that for fiscal 2013 stands at $1.60. Estimate revisions have been minimal in the last 60 days, with only one upward estimate revision for fiscal 2013.

The lack of downward movement in estimates signals that the fourth quarter might be a good one. The stock carries a Zacks Rank #2 (Buy).

We caution against stocks with Zacks Ranks #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

We expect the following stocks to beat earnings estimates in the upcoming quarters given positive Expected Surprise Prediction or ESP (Read: Zacks Earnings ESP: A Better Method) and a favorable Zacks Rank.

Rambus Inc. (RMBS - Free Report) , Earnings ESP of +9.09% and Zacks Rank #1 (Strong Buy).

Actuate Corp. , Earnings ESP of +16.67% and Zacks Rank #2 (Buy).

Diodes Inc. (DIOD - Free Report) , Earnings ESP of +4.0% and Zacks Rank #2 (Buy).

In-Depth Zacks Research for the Tickers Above

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Paychex, Inc. (PAYX) - free report >>

Rambus, Inc. (RMBS) - free report >>

Diodes Incorporated (DIOD) - free report >>

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