Paychex reported second-quarter earnings in line with its results for the last five years. Revenue grew a steady 21% and net income the standard 36%. It's even hard to question the level of earnings management through investment income. Paychex simply continues to perform very well.
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Pandemonium reigns in the market. Panic selling has gripped traders, who can think of nothing to do but drive prices down further. It is times like this when investors fly to companies like Paychex (Nasdaq: PAYX). The Rochester, New York-based company reported its results for the second quarter yesterday. When I wrote about this company three quarters ago, I noted that I could have written the story before the report, since Paychex has maintained amazing consistency in its earnings. Paychex had produced net income growth in excess of 36% every quarter for nine consecutive years. Again yesterday, there were no surprises. Net income increased -- you guessed it -- 36% over the year-ago quarter, on a 21% boost in revenue. Earnings per share came in at $0.16, in line with analysts' estimates, according to First Call. Here is a table showing Paychex's revenue and income growth for the last five-and-a-half years: Am I the only one who is a little bit spooked by the consistency? Income growth within a one-percentage-point range over a five-and-a-half-year period? I'm not suggesting malfeasance; after all, revenue growth has maintained its torrid pace, too. But how do you manage to perform that consistently for that long? It's true that investment income increased by $2.1 million, or 55%, year-over-year. Had it increased at the same pace as revenue, net income would have fallen to 34%. Now wouldn't that have been sad? It would've been like Cal Ripkin sitting out a game... oh, wait, that streak's over already. Anyway, it would have been sad. The funny thing is that Paychex said that its investment income rose because of higher invested balances and higher comparable rates of return. That's not bad in this market. At the end of the quarter, Paychex had $32 million in cash and cash equivalents and $491 million in corporate investments. The cash balance is down $16 million from the previous quarter, but investments were up $30 million as of Nov. 30. That's good investing in these times. Since the company realized less than $6 million in income from these sources, I can hardly fault them for income-statement management in this line item. It's also true that investment income from Paychex's Electronic Network Services (ENS) division, which is counted among its revenue, has increased as a percentage of sales. ENS is the section of the company that handles the float. When you have taxes deducted from your paycheck, that money doesn't go directly to the IRS. It sits for a short while in the hands of the payroll services provider -- Paychex, in many cases. Paychex invests that money in cash and bonds while it's waiting to hand it over to the Feds. Last quarter, that short-term investment earned the company over $17 million. Can't really begrudge them that revenue, either; it's reasonable, safe, and reproducible. There seems to be no fighting it. Paychex performs with amazing consistency. While there must be something managed about its earnings, the company is solid. Its main competitor on the high end, Automatic Data Processing (NYSE: ADP), doesn't quite match Paychex's consistency, but it comes close. It has had 157 consecutive quarters of record highs in both revenues and earnings. Let me repeat -- 157 quarters. That's over 39 years without a drop in revenue or earnings. With steady returns in a high-margin sector, you'll have to wait a long time for Paychex and ADP to become cheap, because everyone wants to have a comfortable port in a storm. 1996 1997 1998 1999 2000 2001(YTD)
Revenue growth (%): 22.5 20.0 23.5 21.0 21.9 21.6
Income growth (%): 36.3 35.6 36.0 36.1 36.6 35.9
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