Could Paychex Earnings Get a Boost From Obamacare?

Paychex (NASDAQ:PAYX) will release its quarterly report on Monday, and improving conditions on the employment front have helped send the stock to levels not seen since 2007. Yet the big question for investors is whether Paychex earnings can grow fast enough to fend off rising competition from Automatic Data Processing (NASDAQ:ADP) and Intuit (NASDAQ:INTU) in the employee-benefits management and payroll-processing services industry.

Paychex faced big challenges when its business customers were doing everything they could to cut expenses. Combined with job cuts that made its services less necessary among its smaller clients, Paychex went through a tough period during the recession. Now that conditions have improved, though, Paychex has an opportunity to get back some of that lost business if it can keep Intuit and ADP at bay. Moreover, complicated employer provisions under Obamacare could give businesses another reason to look to Paychex for outsourcing their HR needs. 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 report.

Stats on Paychex

Source: Yahoo! Finance.

Will Paychex earnings get back to work this quarter?
Analysts have reduced their views on Paychex earnings by the tiniest of amounts in recent months, snipping a penny per share both from August quarter estimates and full-year fiscal 2014 projections. The stock hasn't reacted badly to those modest cuts, though, gaining 10% since late June.

Paychex didn't start out the quarter on the best of footing. The company managed to grow revenue by 6% in its May quarter, but expenses on new product development and ordinary overhead grew almost as much, keeping net income close to unchanged for the quarter. Moreover, guidance for 8% to 9% growth in net income for the remainder of the fiscal year was less than investors had hoped to see, especially as the macroeconomic climate seemed to improve.

Yet the long-term ability for Paychex to grow remains strong. For the most part, Automatic Data Processing has avoided competitive confrontations with Paychex, as ADP has kept its focus on the large employers and their more sophisticated payroll and HR outsourcing needs. By contrast, Paychex has tended to focus more on the small- and mid-sized-business niche, looking to take a much broader audience and offer the less sophisticated but equally necessary services they provide. That has made Paychex more sensitive than ADP to the ups and downs of the small-business economy, but it has arguably given Paychex more opportunities to grow as well.

Unfortunately, Intuit represents a huge threat to Paychex. Intuit's popular QuickBooks and TurboTax software have made its business offerings well known to small businesses, and so it's a natural move for Intuit to cross-sell its cloud-based payroll services.

In the Paychex earnings report, watch to see how the company discusses the potential for Obamacare to boost its customer base. As businesses adapt to the health-care reform laws that will start taking effect shortly, Paychex has an opportunity to educate and enlist new clients who need help navigating an increasingly difficult regulatory landscape for employers generally.

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