While revenue increased slightly and operating income surged, the number of employees Paychex serves -- possibly the most important factor in its business -- grew modestly year over year. The fact that the company can continue holding onto clients, and indeed pick up new ones, testifies to the company's strength.
Paychex competitor Automatic Data Processing
Paychex's staying power is important because roughly two-thirds of its business comes from payroll service, which depends largely on the number of businesses it contracts with and the number of employees those business have. The company wasn't forced to offer more generous terms to retain clients, either. Days sales outstanding, a measure which essentially compares growth in accounts receivable to revenue growth, declined considerably on a year-over-year basis, from 30 to 27. Compare this to 47 for ADP.
A declining DSO typically signals improving margins. Helped by a slight increase in revenue, Paychex was able to squeeze out 1.5 more percentage points from its operating margin, bringing it to 37.8%. That maintains the company's massive lead on ADP and fellow competitor Insperity
Once employment starts to pick up (however far off that day may seem), Paychex should start to grow considerably. But given the company's strong performance even now, and the stock's 3.9% dividend, it might be a good idea to pick up shares while things still seem bad.
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Fool contributor Jacob Roche holds no position in any of the stocks mentioned, although his checks from the Fool do come from Paychex. Automatic Data Processing is a Motley Fool Income Investor pick. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.