Investors are gobbling up shares of payroll services firm Paychex (NASDAQ:PAYX) this morning like there's no tomorrow. Of course, this is also the company that was making fresh 52-week lows just a few weeks ago.
Paychex continued to prove that it's a very healthy business, with total revenues up 11.7% for the quarter and 14.7% for the year. Diluted earnings per share were up a similarly strong 21.3% for the year and 68.8% for the quarter. However, those numbers are affected by some irregular expenses related to legal charges. If you back those expenses out, diluted earnings-per-share growth is only 12.8% for the year and 35% for the quarter. Still, those are robust numbers.
More important than the broad growth numbers at Paychex is the underlying growth in the payroll services portion of the business and the additional services related to payroll processing that the company can charge for. Long-term, there is still room for growth in payroll processing -- not only by possibly taking share from a competitor such as Automatic Data Processing (NYSE:ADP), but also from a number of smaller players in the industry. Small business growth in the U.S. could also help.
The main problem with shares of Paychex over the years has been valuation. However, at the recent 52-week lows, shares were very intriguing and, given the long-term growth potential, they're not terribly priced now. This is the main reason I've decided to keep the company on my radar as a future opportunity -- along with its recurring service model, strong balance sheet, and the increasing dividend payments. In light of this year's performance, I would not be surprised by another increase in the payout since the current dividend, which yields about 1.7%, is only consuming about 50% of the company's free cash flow.
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Nathan Parmelee has no financial interest in any of the companies mentioned. You can view his profile here. The Motley Fool has an iron-clad disclosure policy.
