Wednesday, March 17, 1999
DJIA 9886.62 -43.85 (-0.44%) S&P 500 1294.74 -11.62 (-0.89%) Nasdaq 2426.65 -12.62 (-0.52%) Russell 2000 397.03 -2.14 (-0.54%) 30-Year Bond 96 10/32 -13/32 5.50 Yield

An Investment Opinion
by Warren Gump

Paychex Hits Paydirt

Continuing its track record of strong earnings and revenue growth, payroll processor Paychex (Nasdaq: PAYX) released strong fiscal Q3 earnings per share of $0.22, up from $0.16 last year. As this number beat the First Call consensus estimate of $0.20 per share, investors bid the shares up $2 9/16 to $49 3/8 at midday.

So the thought of investing in a company that processes your paycheck doesn't sound too interesting? Taking a peak at the company's financial performance might change your mind. Paychex is a cash machine. In fiscal 1998, the company had a net margin of 22.4%. That means that for every dollar of revenue created, the company earned over $0.22. To put that in perspective, Coca-Cola (NYSE: KO) only had net margins of 18.8% in 1998!

Paychex has achieved its success by catering to the needs of the booming small and mid-size business sector, those with 100 or fewer employees. In addition to providing payroll services, the company offers human resource services like 401(k) recordkeeping and professional employer services that enable the outsourcing of human resource functions. Even after torrid growth this past decade, the company serves less than 6% of the roughly 5 million full-time employers in the nation.

All signs indicate that Paychex is well positioned to continue its growth. Governmental employment regulations are continually becoming more demanding and an increasing number of companies are outsourcing non-core functions like payroll and human resources.

Using a traditional valuation tool like the price/earnings (P/E) ratio, Paychex looks expensive at 54x calendar 1999 earnings estimates. However, considering the company's superior business model and strong long-term growth prospects (estimated at 27%), you may want to dig a little further. Relative to many of the high-priced stalwarts with projected 12%-18% growth, Paychex looks quite appealing.


Media streaming technologies developer RealNetworks (Nasdaq: RNWK) gained $13 1/2 to $128 1/2 after The Wall Street Journal reported that Microsoft (Nasdaq: MSFT) will introduce its new Internet Explorer 5.0 browser tomorrow, which will include RealNetworks' RealGuide online streaming media directory. In November, Microsoft announced it would dump its 10% stake in RealNetworks, saying "the rapid pace of innovation and our competing visions for streaming media means our investment in RealNetworks no longer makes sense."

Farm and heavy construction machinery manufacturers got a boost this morning as Salomon Smith Barney raised its ratings on companies throughout the sector. Among the big winners, Deere & Co. (NYSE: DE) sprinted $2 higher to $35 1/8, Caterpillar (NYSE: CAT) crawled ahead $2 13/16 to $46 13/16, Case Corp. (NYSE: CSE) rose $1 13/16 to $23 3/8, New Holland (NYSE: NH) added $7/16 to $9 1/2, and AGCO (NYSE: AG) gained $9/16 to $6 5/8.

Frontier Corp. (NYSE: FRO), a facilities-based provider of local and long-distance telecommunications services to businesses, jumped $6 3/4 to $51 3/8 after agreeing to be acquired by international fiber optic network operator Global Crossing (Nasdaq: GBLX) in a stock swap valued at about $11.2 billion. Global Crossing fell $4 5/8 to $46 7/8 on the news. For more details, see this morning's Breakfast With the Fool.

Quick-serve restaurant operator and franchiser Wendy's International (NYSE: WEN) picked up $1 3/4 to $29 after saying 10% same-store sales gains at its namesake restaurants and Tim Hortons coffee and doughnut shops in Canada so far in its fiscal Q1 will lead to EPS for the period between $0.22 and $0.23 (excluding gains from real estate sales.) The First Call mean estimate had called for EPS of $0.21 in the quarter. Due to the strong results, the company boosted its fiscal 1999 base EPS growth target range to 15%-17.5% from its previous 12%-15% range.

Car rental chain operator and franchiser Dollar Thrifty Automotive Group (NYSE: DTG) drove $1 15/16 higher to $14 1/8 after saying strong car rental demand will lead to Q1 EPS exceeding $0.15, beating the First Call mean estimate of $0.06. The company also said it expects fiscal 1999 EPS to roll in between $1.70 and $1.80.

Motor home manufacturer Winnebago Industries (NYSE: WGO) rumbled $1 5/8 higher to $15 5/8 after posting fiscal Q2 EPS of $0.45, up from $0.18 a year ago and well ahead of the First Call mean estimate of $0.26. The company said its 1999 models have been well-received, and low interest rates, low fuel prices, and high consumer confidence levels are sustaining the company's business momentum.

Cement producer Southdown (NYSE: SDW) headed north and gained $2 3/4 to $49 1/2 after saying higher average selling prices and strong February demand due to unusually warm weather will result in Q1 EPS between $0.67 and $0.74 (including a $0.10 extraordinary gain), topping the First Call mean estimate of $0.48 (which the company said also included the gain).

Information technology consulting firm Ciber Inc. (NYSE: CBR) tacked on $2 5/16 to $21 5/16 after Merrill Lynch reinstated coverage of the firm with a near-term "buy" rating. Credit Suisse First Boston also reportedly got in on the act by raising Ciber's fiscal 2000 earnings estimate to $1.29 per share from $1.25 per share.

Internet advertising firm 24/7 Media (Nasdaq: TFSM) gained $2 1/2 to $30 1/2 after announcing an exclusive three-year agreement to form an advertising sales force with General Electric's (NYSE: GE) NBC-Interactive Neighborhood unit targeting the convergence of TV and the Internet at the local level. The sales force will initially operate out of NBC affiliates in New York, Los Angeles, Chicago, Dallas, San Diego, and Washington, D.C.

Network software developer Novell (Nasdaq: NOVL) was lifted $1 15/16 to $26 after Merrill Lynch raised its long-term opinion of the company to "buy" from "accumulate."

Application software development products supplier Progress Software (Nasdaq: PRGS) rose $3 to $33 after reporting fiscal Q1 EPS of $0.35, up from $0.19 a year ago and ahead of the First Call mean estimate of $0.26. Additionally, the company said its Progress Apptivity unit has been selected to handle Web portal Yahoo!'s (Nasdaq: YHOO) advertising order entry process.

Therapeutic and diagnostic medical systems developer Sabratek Corp. (Nasdaq: SBTK) advanced $7/8 to $18 3/8 following an upgrade late yesterday from Credit Suisse First Boston to "buy" from "hold."


Investment banking firm Donaldson, Lufkin & Jenrette (NYSE: DLJ) slumped $3 15/16 to $64 7/8 following the news that it filed a preliminary registration statement with the SEC for an initial public offering of a new tracking stock for DLJdirect, its online brokerage business. The stock would trade under the symbol "DIR." (See Warren Gump's Fool on the Hill column last night on tracking stocks.)

Network switching systems company Tekelec (Nasdaq: TKLC) moved back $2 3/4 to $8 after saying last night that Q1 EPS is seen coming in below the year-ago $0.10 profit as new business growth has slowed beyond the usual seasonal slowing typical of the quarter. Five analysts surveyed by First Call currently provide a consensus $0.11 projection. BT Alex. Brown cut Tekelec to "buy" from "strong buy" this morning.

Saks Fifth Avenue parent Saks Inc. (NYSE: SKS) retreated $2 3/16 to $26 3/4 after it said it is "comfortable" with 1999 earnings guidance of $2.10 to $2.25 a share, down from previous forecasts of $2.20 to $2.25. The department store operator reported fiscal fourth quarter earnings of $0.97 (before charges), up from $0.77 a year ago and in line with analysts' estimates.

Polyurethane and polymer foam products manufacturer Foamex International (Nasdaq: FMXI) bubbled off $2 11/16 to $4 7/8 after it said it expects to report a Q4 loss of $1.37 per share, down from last year's $0.96 loss. The company hired J.P. Morgan to help examine strategic alternatives and named former Safety-Kleen CEO John Johnson Jr. as CEO, replacing Andrea Farace, who resigned. Marshall Cogan, a former Foamex CEO, was named chairman.

Automotive supplier Lear Corp. (NYSE: LEA) slowed $15/16 to $35 7/16 after announcing that it will acquire United Technologies Corp.'s (NYSE: UTX) UT Automotive Inc. subsidiary, a maker of electrical and electronic products, for $2.3 billion. The deal is expected to add to Lear's earnings by $0.05 per share this year and $0.35 next year.

Electronic manufacturing services company Plexus Corp. (Nasdaq: PLXS) slid $2 11/16 to $30 1/2 after agreeing to buy advanced commercial and medical electronic instruments designer and manufacturer SeaMED Corp. (Nasdaq: SEMD) for between $12 and $15 per share. Yesterday's close was $7 11/16 a stub. SeaMED also pre-announced EPS of between $0.03 and $0.06 before items for the quarter ending March 31, compared with First Call's four-analyst $0.16 consensus estimate.

Online software retailer Beyond.com (Nasdaq: BYND) lost $1 7/16 to $22 15/16 after announcing plans to sell an additional 4 million shares to the public, boosting its total outstanding shares by about 15%.

Enterprise information portal developer Alydaar Software (Nasdaq: ALYD) gave back $7/8 to $7 1/4 after saying it expects a Q1 loss of $500,000 to $1 million. Q4's loss was $0.17 per share, compared with breakeven a year ago.

Telecom billing and customer service software provider Saville Systems PLC (Nasdaq: SAVLY) lost $1/4 to $9 3/4 after Hambrecht & Quist cut its rating on the stock to "hold" from "buy."

Telephone and Internet travel reservations company 800 Travel Systems (Nasdaq: IFLY) dropped $5/16 to $7 3/8 after adding $2 1/2 yesterday in heavy trading after reporting fourth-quarter earnings of $0.04 per share, twice the estimate one analyst gave First Call.

Internet venture capitalist Safeguard Scientifics (NYSE: SFE), which this morning announced a 20% stake in Ohio's Extant Inc., an extranet and virtual private network provider, shed $4 1/16 to $55 7/16. Yesterday the stock gained $11 5/16 following comments by CEO Warren Musser on CNBC that the company expects strong growth this year at its five or six companies currently "poised to go public."


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