I'm a fan of "float" businesses such as Paychex (NASDAQ:PAYX). In times of rising interest rates, the money that Paychex and competitors such as Automatic Data Processing (NYSE:ADP) make from carrying cash for clients -- before employees cash checks and the IRS takes its cut -- is quite impressive.
The quarterly details on sales, EPS, and balance-sheet metrics are in the Fool by Numbers published earlier today, so I'll use this space to talk more about some of the underlying details in the numbers.
While the bulk of the business is payroll services, which grew revenues by 10%, the company's HR services business continues to shine. For the year, the segment grew revenues by 29%, and the professional employer-services portion, which like Administaff (NYSE:ASF) offers co-employer service offerings, grew by 25%. On its conference call, the company mentioned that as part of being a co-employer, Paychex participates in the risks and rewards associated with workers-compensation insurance. This business is a small portion of Paychex, but it's growing quickly, and worth watching.
Given this quarter's exceptional strength, why did shares trade down so far today, despite mostly rising prices elsewhere in the market? If I had to guess -- and believe me, I'm glad I don't have to -- I'd point toward the company's guidance. Next year, Paychex forecasts payroll-service revenue growth of 9%-11% and human-resource services growth of 20%-23%, resulting in 11%- 3% growth overall. On the bottom line, which includes 28%-30% growth in funds held for clients, the company expects growth of 12%-14%.
In short, I think folks expected greater growth from the HR services business and perhaps didn't expect the 4%-5% that will come from option expensing next year. However, even with these items, growth around 13% is nothing to scoff at. Considering the 1.6% yield on the shares, and the likelihood of dividend increases that I expect will exceed 10% per year, earnings growth in the low double-digits makes the shares reasonable.
But "reasonable" isn't quite good enough, and Paychex isn't cheap enough for me to purchase it yet. I love the business, but I want a larger margin of safety to work with, in case I've overestimated the company's growth. That said, given how the market has behaved in the last month or so -- especially Paychex shares -- I might just get a chance to buy it soon.
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At the time of publication, Nathan Parmelee had no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
