Paychex Looks Cheap

Paychex (NASDAQ: PAYX) reported its Q4 and fiscal year 2008 results on June 26. Net income in 2008 grew 12% to $576 million or $1.56 EPS, and revenue grew 10% to cross the $2 billion milestone. It took Paychex over 30 years to get to the first billion and only five years to reach the second.

In a major development, Paychex has enhanced its MMS product line so that these products can be delivered via the web through a software-as-a-service (SaaS) model. Last year, I suggested Paychex could be a SaaS aggregator. Now that the company is finally thinking more along the SaaS lines rather than as a BPO, it will be interesting to see how the story develops.

Let us now take a look at Q4 results. Revenue grew 7% to $510.2 million while net income grew 12% to $135.5 million, or $0.38 EPS. Analysts had estimated EPS of $0.38 on revenue of $529.1 million. Despite being affected negatively by the weak economy and declining interest rates, Paychex put in a strong performance by reducing expenses by 2% to $321.4 million. By segment, 2008 Payroll Services revenue grew 8% to $1.5 billion and Human Resources Services revenue grew 19% to $0.5 billion to meet the lower end of their earlier forecast. For Q4, Payroll Services revenue was up by 6% to $365.5 million and Human Resources Services revenue grew 15% to $122.4 million.

The results of Paychex and ADP are often good indicators of the health of the economy, as I have discussed in earlier posts available here and here. Paychex reported that clients who are going out of business or who no longer have employees increased 11% y-o-y; the phenomenon has spread throughout the USA. The company normally plans for such situations, but in 2008 there were more than 3,000 unexpected failures. Even the number of clients who shifted to non-processing status increased by more than 3,000. There were fewer recruits and new business starts.

Taking into account these factors, Paychex gave a conservative outlook for fiscal year 2009. It expects revenue growth in the range of 7% to 9%, or $2.21 to $2.25 billion. Net income growth is expected to be in the range of 2% to 4%, or $587.7 to $599.2 million. Payroll Services revenue growth is expected between 7% and 8% and Human Resources Services revenue growth between 19% and 22%. Analysts expect profit of $611.9 million on revenue of $2.24 billion.

Paychex is currently trading around $31, close to its 52-week low, with a market cap of around $11 billion. I think it is a very good company with a great business model, and this may be a good opportunity to buy the stock.