Foolish Forecast: Will Paychex Get a Raise?

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Paychex (Nasdaq: PAYX) reports fiscal 2009 first-quarter earnings Wednesday afternoon. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

• Buy, sell, or waffle? Seventeen analysts follow Paychex, giving it seven buy ratings, nine holds, and a sell.
• Revenues. On average, they're looking for 7% revenue growth, to $540.4 million.
• Earnings. Profits are predicted to be up a penny at $0.41 per share.

What management says:
It's looking to be a rough year for Paychex. Whatever the company reports for Q1 results, more important by far will be whether management manages to raise guidance from the disappointing numbers promised last quarter: Total revenues are expected to grow a respectable, if not terrific, 8%. Management puts a brave face on things, arguing that: "Growth in operating income, net of certain items, is expected to approximate 13% for fiscal 2009." [Emphasis added.] But between higher taxes and those "items," we're told to expect net profit growth of less than 5%.

What management does:
Don't judge Paychex too harshly, though. It can't be easy to improve on what the company's already accomplishing. Operating margins last year improved to pass the 40% mark -- an embarrassment of riches that really should embarrass less-profitable rivals ADP (NYSE: ADP), Administaff (NYSE: ASF), Intuit (Nasdaq: INTU), and Hewitt Associates (NYSE: HEW).

Margins	2/07	5/07	8/07	11/07	2/08	5/08
Gross	67.2%	67.4%	67.6%	67.9%	68.0%	68.0%
Operating	38.5%	37.2%	37.5%	37.9%	38.8%	40.1%
Net	28.1%	27.3%	27.5%	27.5%	27.6%	27.9%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Reviewing fiscal 2008 earnings three months ago, I left one piece of the story unsaid, because Paychex didn't mention it. We had to wait for the company's 10-K statement to arrive to learn this, but we finally know how much cash the company generated last year: $642.4 million. For the record, that's 16% more cash than the company generated in fiscal 2007, and 12% more than it reported as net income under GAAP.

Unfortunately, this still leaves the stock selling for more than 18 times its free cash flow, which seems a bit rich relative to the 14% long-term growth that analysts project for Paychex. On the other hand, if management can produce a bit of raised guidance on Wednesday, that would go a long way to closing that gap.

For more on Paychex, read:

• A Big Upgrade for Paychex
• 7 of the Best Businesses to Own
• Paychex Promises, Delivers