Paychex Earnings: An Early Look

Earnings season is just about over, with almost all companies already having reported their quarterly results. But there are still a few companies left to report, and Paychex (PAYX +3.15%) is about to release its quarterly earnings. The key to making smart investment decisions with stocks releasing their quarterly reports is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed knee-jerk reaction to news that turns out to be exactly the wrong move.

With the U.S. economy having suffered from consistently high unemployment for years, Paychex has faced tough conditions for its payroll and HR services business. But the company has done a good job of holding up well despite those employment headwinds. Let's take an early look at what's been happening with Paychex over the past quarter and what we're likely to see in its quarterly report on Wednesday.

Stats on Paychex

Source: Yahoo! Finance.

Will Paychex hire some better numbers this quarter?
Analysts have been reasonably secure in their estimates of Paychex's earnings in recent months, reducing their call for the just-ended quarter by a penny per share but keeping their full 2013 fiscal year estimates unchanged. The stock has risen almost 10% since mid-December.

Over the years, Paychex has benefited from what Fool contributor Brian Stoffel recently called the "stickiness effect." Once a client signs up with Paychex, it becomes difficult to switch to another provider or to give up the service entirely. That's a big part of why Paychex and rival Automatic Data Processing (ADP +3.33%) have divided up the industry the way they have, with ADP gravitating toward bigger corporate customers and Paychex picking up a lot of medium-sized and small business customers.

But Paychex has faced new competition from Intuit (INTU +4.69%), which has successfully leveraged the popularity of its Quickbooks and TurboTax software packages among small-business owners to try to cross-sell its Intuit Online package of payroll and invoicing software. Given Intuit's long history of innovative products and expansion into new areas, it may be Paychex's biggest threat.

One area where Paychex could see improvement is in retirement plan administration. With more employers moving to auto-enrollment for 401(k) plans, plan administrator Aon Hewitt (AON +1.71%) hopes to see business pick up. Paychex also plays a role in that area, and a pick-up in small-business participation in providing retirement plans to workers could disproportionately help Paychex over its rivals.

In its quarterly report, watch Paychex not just for its own earnings but for the state of employment in the U.S. economy generally. If things are looking up for Paychex, they could be getting more favorable for the entire nation.

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