The Key for Paychex to Grow

On Wednesday, Paychex (PAYX -0.02%) will release its latest quarterly results. With the employment picture starting to perk up, the payroll and HR-services industry stands to benefit the most from an uptick in hiring, and Paychex hopes to stake its claim to get its fair share of new business.

Paychex faces plenty of challenges, however, as companies do their best to streamline their internal operations in order to maximize efficiency and cut costs. With increasing competition from both its established rivals and new upstarts, can Paychex keep its competitive advantage intact? 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.

Stats on Paychex

Source: Yahoo! Finance.

Will Paychex's earnings sink or swim this quarter?
Analysts have been guardedly optimistic about Paychex and its earnings lately, boosting their calls for the May quarter by a penny per share along with their full-year fiscal 2014 consensus. The stock has responded favorably, climbing about 8% since mid-March.

In general, increases in employment are good for Paychex. With employers starting to hire again, more of them will need the payroll-processing and other services that Paychex provides, and that should provide at least modest growth going forward.

Yet Paychex faces competitive threats on multiple fronts. On one hand, traditional rival Automatic Data Processing (ADP -0.79%) has recently reupped on a deal with Visa to let employers pay their workers through prepaid Visa cards. For ADP's traditional big-business customers, that's not necessarily a huge draw, but for small- and mid-sized companies that tend have less formal arrangements for paying their employees, the program is appealing. That's especially troubling for Paychex because it has tended to favor those smaller businesses, leaving the biggest companies to ADP.

Meanwhile, Intuit (INTU 0.49%) hasn't been standing still either. It caters to customers who want automated solutions like its QuickBooks software rather than full-service HR coverage, but by trying to offer those customers more services, Intuit already has inroads with those customers and could eventually lure Paychex clients over to its side as well.

In order to fend off that competition, Paychex made a move earlier this month, buying the maker of the hiring and work-flow software suite myStaffingPro. In addition, enhanced versions of its smartphone app attempt to make Paychex services more accessible to employees, giving them information about their health benefits and flex-account balances in a convenient format.

In Paychex's report, watch for further discussion of the myStaffingPro buyout and how it fits into the company's overall strategy. At this point, Paychex should start enjoying some tailwinds, but only if it can maintain its strong position within the growing industry.

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