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Earnings Preview: Paychex Inc.

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Paychex Inc. (PAYX - Free Report) is scheduled to announce its fourth quarter fiscal 2012 results on June 28 after the closing bell, and we notice limited upward movement in estimates at this point.

Third Quarter Overview

Paychex delivered modest third quarter 2012 results, with earnings of 37 cents per share matching the Zacks Consensus Estimate. The 2.8% increase from the year-ago quarter was on account of revenue improvement across all its segments.

Revenues grew 7.2% year over year, backed by increases of 12.3% in Human Resource Service revenue and 5.5% in Payroll Service revenue.

Higher operating expenses resulted in operating margin contraction of 50 basis points year over year.


Paychex seemed 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.

Agreement of Analysts

Out of the 21 analysts providing estimates for the fourth quarter, we noticed absolutely no revision. Of the 23 estimates for fiscal 2012, only one went up in the last 30 days.

The limited movement since Paychex reported third 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 - Free 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.

Magnitude of Estimate Revisions

There was no change in the Zacks Consensus Estimate for the fourth quarter in the past 90 days. But the estimate for fiscal 2012 moved forward by a penny to $1.52 in the past 30 days. The estimate for fiscal 2013 remained unaltered at $1.63.


The market is losing confidence on the growth of the 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 it 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 of Icon Time Systems in January 2012. In this environment, we believe that cost control will play an important role for Paychex.

Despite new business wins in the SMB sector, stiff competition from Automated Data Processing and Insperity (NSP - Free Report) , and an uncertain unemployment situation will remain constant worries. However, Paychex’ zero European exposure will be benefit.

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

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