With shares of human resources service provider Administaff (NYSE: ASF) getting nearly halved in the past few months, I was increasingly tempted to jump into some detailed analysis. Today's 11% increase on strong earnings tempers my enthusiasm a bit, but I think this business is still worth a look.
For the company's second quarter, revenues rose 21%, operating income increased 29%, and earnings per share improved 32% versus last year's performance. This performance boost came from an increase in both the number of paid worksite employees and the average rate charged for each employee.
A couple of items stand out on the income statement: the 118% increase in advertising expense, and the 126% rise in interest income. The advertising expense primarily stems from a shift in timing, but the increase in interest income mirrors what we saw at Paychex (Nasdaq: PAYX), and what we should see at Automatic Data Processing (NYSE: ADP) shortly: Increased cash balances and higher interest rates. Right now, this metric is more meaningful for Paychex and ADP, but it is worth paying attention to at Administaff as the company grows.
It's also interesting how quickly the company grew its business during the quarter compared to Paychex. The latter company also offers HR services, including professional employment organization (PEO) services. Paychex saw sales for its total HR services business increase by 29%, while PEO sales rose 25%. In both cases, this is faster than Administaff's reported 21% growth, but remember that Paychex's total HR services business is equivalent to Administaff's PEO business.
Perhaps more importantly, both companies still see fairly strong growth going forward. Administaff is using its stronger-than-expected growth to also increase its estimates for operating expenses. The increased spending will also allow the company to offer additional products to customers, rather than simply supporting additional customers on existing products. While that may ruffle some feathers, I think it's a sound long-term decision.
Overall, I find Administaff an attractive investment idea. Its systems make managing employees easier for small to mid-sized companies, and the switching costs to another provider or to an internally operated system are fairly high, since it takes effort to move to new systems and new people. Customers may still switch, but I think you'd have to significantly alienate them, or really fall behind in competitive offerings, to prompt a large migration. Like Paychex, the company has traded down lately, which means now is the time to dig in and take a look at the potential case for a long-term investment.
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At the time of publication, Nathan
Parmelee had no interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
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