There are certain businesses that are not only exceptional long-term investments but also are useful in portraying the overall health of the economy. FedEx (NYSE:FDX) and the transports are one such thermometer. Centralized payroll and human processing entities like powerhouse Automatic Data Processing (NYSE:ADP) and rapidly growing Administaff (NYSE:ASF) are another. Boring, you say? Well, sometimes boring is where the money is.
In September, Fool contributor W.D. Crotty offered glowing remarks for Paychex (NASDAQ:PAYX), a player in the personnel management industry. As of its last annual filing, the company had roughly 522,000 clients, many of which are small- to medium-sized businesses located in America's largest markets and have fewer than 100 employees. Paychex has managed to maintain a high fiscal-year client retention rate, just shy of 80%, but the majority of those it does lose are small companies going out of business. This kind of market exposure and information on small business success rates provides a unique snapshot of the general robustness for our economy.
A look through its second-quarter report portrays a company that is still going strong. Its top line grew by 15.1% for the quarter, in part because of a 66% increase in revenue from administrative fees -- which is essentially a customizable human resources product tailored to the needs of small businesses.
Earnings were $0.30 per share, up 30% from the same period a year ago -- a penny higher than consensus analysts' estimates. Net income growth outpaced sales increases as Paychex improved on its profitability. Year-to-date operating margins are now at 40%, surpassing the levels achieved over the past five fiscal years. CEO John Judge said in the conference call that the company is able to increase margins by sticking to a "mandate that every new dollar be more profitable than the last." To achieve this lofty goal, Paychex has been very deliberate in prioritizing its expenses.
And fatter margins mean more cash. Paychex has $792.5 million in cash and short-term investments, up 12% from the year-ago period. The company didn't offer any specific plans for the cash but advised that it wouldn't spend it just for the sake of spending. It did mention that raising dividends would continue for the foreseeable future.
The economy is looking good, and this company is looking even better. At 30 times next year's earnings, Paychex certainly isn't cheap. But sometimes we have to be willing to pay up for quality, and this well-run business warrants a premium price tag. If you are a patient investor, you may be able to hold out for a better deal, but if you have a long-term horizon, you should be satisfied with a purchase at this level.
For more Foolishness on Paychex's primary competitor:
FedEx is a Motley Fool Stock Advisor selection.
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Fool contributor Jeremy MacNealy does not own shares in any of the companies mentioned.
