Paychex: Still Best in Class

Paychex (Nasdaq: PAYX  ) continues to cash in on cutting corporate checks, reporting another solid quarter today.

While revenue increased slightly and operating income surged, the number of employees Paychex serves -- possibly the most important factor in its business -- grew modestly year over year. The fact that the company can continue holding onto clients, and indeed pick up new ones, testifies to the company's strength.

Paychex competitor Automatic Data Processing (Nasdaq: ADP  ) also had mostly flat client growth in its most recently reported quarter, though its expansion slightly outpaced Paychex's. However, this is somewhat misleading. The three-month period for Paychex begins in December, when many businesses, especially retailers, hire en masse to help with the holidays. This inflates December employment, but since most of these workers are temporary, the next couple of months show a big drop. By starting its quarter in October, ADP's numbers capture the employment growth, while Paychex captures the subsequent decline.

Paychex's staying power is important because roughly two-thirds of its business comes from payroll service, which depends largely on the number of businesses it contracts with and the number of employees those business have. The company wasn't forced to offer more generous terms to retain clients, either. Days sales outstanding, a measure which essentially compares growth in accounts receivable to revenue growth, declined considerably on a year-over-year basis, from 30 to 27. Compare this to 47 for ADP.

A declining DSO typically signals improving margins. Helped by a slight increase in revenue, Paychex was able to squeeze out 1.5 more percentage points from its operating margin, bringing it to 37.8%. That maintains the company's massive lead on ADP and fellow competitor Insperity (NYSE: NSP  ) (formerly Administaff).

Once employment starts to pick up (however far off that day may seem), Paychex should start to grow considerably. But given the company's strong performance even now, and the stock's 3.9% dividend, it might be a good idea to pick up shares while things still seem bad.

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