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Street wary of economy's impact on Paychex

Rochester Business Journal
September 28, 2012

A gradually improving economy has Paychex Inc. officials optimistic that the company can continue the growth it has seen since the lows of the Great Recession, but analysts weary of the sluggish economy express a more uncertain assessment of the company.

Paychex reported financial results this week from its fiscal first quarter, a period with continued growth in indicators such as checks per payroll. But as the company failed to meet Street expectations for revenues, some analysts downgraded the stock on fears that the slowly expanding economy will hinder future top-line growth.

Quarterly results were reported after the market closed on Monday, and the company's stock was down more than 3 percent at midweek.

Paychex reported $153.1 million in net income, up 3 percent from a year ago. For the quarter it reported earnings of 42 cents per share, up a penny from a year ago and beating analysts' expectations by a penny a share.

The company also logged $578.2 million in revenue for the quarter, an increase of 3 percent but below the $584 million analysts had expected.

There were positive signs in the results, said Martin Mucci, Paychex president and CEO. Checks per payroll grew for 10 consecutive quarters, though the growth slowed to 2 percent in the first quarter from 2.4 percent a year earlier. Payroll client retention also remained strong after reaching historic levels in 2012, Mucci noted.

"Execution and operations remain solid, as evidenced by exceptionally strong client satisfaction results," he said.

Still, analyst Vishnu Lekraj with Morningstar Inc. said Paychex continues to face difficult conditions.

"Management mentioned a few key positives for the quarter, including increased checks per client and revenue per check," Lekraj wrote this week in a note to investors. "However, we believe anemic new business starts continue to be a headwind for the firm's core payroll service.

"This obstacle should start to reverse over the next fiscal year as the economy improves and the firm's revamped sales structure gains momentum."

One major driver for Paychex's payroll-processing business, new client acquisitions, remains under pressure, Lekraj added. But he offered optimism that Paychex was making progress.

"Even though the overall macroeconomic environment remains uncertain, we expect to see the firm's revamped new sales operations begin to help move new client sales in a positive direction," Lekraj wrote. "We will watch closely for evidence of this trend over the coming quarters."

Mucci said he saw improvements in the company's sales. Paychex expanded its territories in the quarter and put greater focus into franchise and banking opportunities, he said.

"We expect to see additional penetration of our products and services within our client base with the goal of increasing our share of revenue from our clients," he said.

Technological improvements also have helped the company, Mucci said. In the last year Paychex has introduced enhancements to online and mobile applications, creating a single sign-on to access all product information on tablet, iPad and smartphone applications released in June.

When asked during a conference call by Joseph Foresi, analyst with Janney Montgomery Scott LLC, about how the economy has affected new business growth, Mucci again expressed optimism.

"I think we still see kind of a gradually improving economy-no great shakes, but it has met our expectations and we're pleased with that," Mucci said. "And I think where we feel really good is that the revenue we're driving per client has certainly met our expectations or even a little bit better. So we're feeling good about that first-quarter start."

Efrain Rivera, Paychex chief financial officer, added that new business formation is growing from past years, but at a slow clip.

"If you look at the BLS data that was available in August for the full year 2011, you had 758,000 businesses formed versus 742,000 the year before," Rivera said. "I mean, business formation is just dragging ahead slowly. It's getting a little bit better.

"It's certain we still are not in an optimal environment, and that 758,000 still compares to 844,000 before the Great Recession started or the year had started."

It was this sluggish economy that led one analyst to downgrade Paychex

Before the quarterly results were released, analyst Jason Kupferberg of Jeffries & Co. downgraded Paychex stock from "hold" to "underperform." He noted that Paychex has been hurt by a challenging employment market. After being cautious for some time on the company, he wrote to investors that it was now time to sell the stock.

Paychex operates in a business that is relatively mature, and any growth in its newer services will likely remain below pre-recession levels, he added.

This week Paychex was downgraded to "sell" by Citibank, which noted that it sees "limited near-term catalysts for the stock, given our expectation for meager job growth and low interest rates." Citibank also noted that Paychex has had difficulty growing its client base, "the most sustainable source of long-term growth."

UBS AG also cut its rating on Paychex to neutral, citing "cautious overall commentary and general top-line lightness."

At midweek, five brokers surveyed had Paychex stock as a buy or strong buy, 15 as a hold, three as underperform and three as sell, Thomson Reuters reports. / 585-546-8303

9/28/12 (c) 2012 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email

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