After a brief dip and some nervousness about the outlook for Paychex
For its first quarter, the payroll and human resources service provider delivered total revenue growth of 14%, with 9% growth in payroll services, 21% in human resources, and 55% growth on the funds that Paychex holds for clients (float). With expenses up an almost equal 13%, operating income also increased by 14% and diluted earnings per share increased almost 17% to $0.35 a share from last year's $0.30 a share. Balance sheet details and some additional information on margin can be found in our Fool by Numbers published earlier today.
That's the big picture, but different parts of the business at Paychex are at very different levels of maturity. The payroll business, which competes with Automatic Data Processing
Paychex believes it will achieve the fiscal 2007 results it laid out for investors last quarter, and I have no reason to doubt the company on this point. Looking out to fiscal 2008 and 2009, the exact picture isn't clear. If interest rates begin to head back down, that will hurt the company's investment income, and it likely means the economy is slowing, which also doesn't bode well for Paychex. However, a longer three-, five-, or 10-year horizon still looks good for this company, and it's this time horizon that matters most.
The question becomes what kind of growth is priced into the company's shares for the next five to 10 years and if that growth is achievable. By my estimates, at $37 a share, about 9% to 10% growth is priced into the shares for 10 years, but at $30 a share there is only about 5% to 6% growth priced in. If an opportunity below $30 presents itself in the next six months, it is something I would strongly consider and something I think other investors should consider as well.
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