It's the next best thing to payday for investors in payroll processor Paychex (NASDAQ:PAYX). That's right, folks. We've punched the clock on yet another quarter (this time, the fiscal third quarter of 2006), and it's time to open the envelope and see how the company did. Earnings are due out tomorrow after market close.

Wall Street Wisdom:

  • General consensus. Twenty-seven analysts follow Paychex, with 11 of them rating the stock a buy and 16 more a hold. No one's selling this one.
  • Revenues. Analysts expect 14% revenue growth over fiscal Q3 2005, to $426.1 million.
  • Earnings. Profits are expected to rise an astounding 29% to $0.31 per share. Think that's good? The company has beaten expectations in three of the past four quarters.

Margin watch:
The Paychex story just keeps getting better. Over the past year and a half, rolling gross margins are up 390 basis points -- of which 380 points made it all the way down to the bottom line. Incredible.

Margins %

8/04

11/04

2/05

5/05

8/05

11/05

Gross

73.4

70.6

70.7

77.2

77.3

77.3

Op.

36.3

36.2

37.4

36.9

37.8

38.5

Net

23.3

23.2

23.5

25.5

26.3

27.1

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

Foolish forensics:
Paychex succeeds because it operates a very lean machine. Consider: Last quarter, Paychex grew its sales by 15%. But the cost of those sales rose only 10%, and selling, general, and administrative expenses (SG&A) grew only 8%. In Q1, the numbers were similar: 17% sales growth, 9% growth in the cost of those sales, and a 14% in SG&A. Simply put, Paychex's size gives it leverage -- the more sales it makes, the more profitable each of those sales becomes.

Foolish lookout:
When I see results like these, I figure there's got to be a catch. Often, managers who run these kinds of businesses get greedy, rewarding themselves with a good portion of the profits in the form of stock-option grants. Not here. Over the past year, Paychex's diluted share count has risen less than half a percent.

I do see that in February, Paychex's board decided to reward the CEO with a $50,000 boost to his salary, and approved an annual bonus of as much as 100% of his salary for this year and as much as 120% for next year. Those are large sums, but considering the company's performance and the absence of stock dilution, I actually think they're warranted here.

Competitors:
Paychex competes with ADP (NYSE:ADP), Ceridian (NYSE:CEN), and Administaff (NYSE:ASF), among others.

Fool contributor Rich Smith has no interest, short or long, in any company named above.