After beating earnings estimates in each of the quarters in the first half of last year, the best that payroll specialist Paychex (NASDAQ:PAYX) was able to manage in the second half was to meet expectations. Can it do even that when it reports its fiscal Q1 2008 numbers tomorrow afternoon?
What analysts say:
- Buy, sell, or waffle? Twenty analysts follow Paychex, giving it 11 buy ratings and nine holds.
- Revenues. On average, they're looking for 11% revenue growth to $511.6 million.
- Earnings. Profits are predicted to pace revenue growth, rising 11% to $0.39 per share.
What management says:
CEO Jonathan Judge summed up the entirety of fiscal 2007 in two lines back in June: "Fiscal 2007 is our seventeenth consecutive year of record revenues and net income. We have experienced record levels of client retention, product penetration, and solid profit results." Known primarily for its payroll services, the firm actually experienced its fastest growth in its human resource services division, where sales were up 22% year over year (vs. 9% in payroll services.)
What management does:
Gross margins grew steadily all year long in fiscal 2007, but the story hasn't been as good further down the income statement. Rising operating costs -- in large part the function of an increase in litigation expense recorded during fiscal Q3 last year -- have contributed to a recent reduction in both operating and net margins. The good news here: Litigation doesn't last forever. (It only feels like it.) At some point, the firm's dispute with Rapid Payroll, Inc. will resolve itself and Paychex can start expanding its margins once again.
And the other good news: Trending down or not, Paychex's operating margins still dwarf those of rivals ADP (NYSE:ADP), Ceridian (NYSE:CEN), and Administaff (NYSE:ASF).
|
2/06 |
5/06 |
8/06 |
11/06 |
2/07 |
5/07 | |
|---|---|---|---|---|---|---|
|
Gross |
66.6% |
66.5% |
66.8% |
66.9% |
67.2% |
67.4% |
|
Operating |
38.7% |
38.8% |
38.9% |
39.0% |
38.5% |
37.2% |
|
Net |
27.5% |
27.8% |
28.0% |
28.3% |
28.1% |
27.3% |
One Fool says:
Peering into fiscal 2008, Paychex has told us to expect more of what we saw in fiscal 2007 (minus, one hopes, the Q3 litigation charge): 9% or 10% revenue growth in payroll services, low-20s growth in human resource services, combining to yield about 12% growth in total revenue year over year.
The firm also appears to be expecting that margin expansion will resume right quick, in contrast to the last couple of quarters, and it's predicting that net income will outgrow revenues by about 15% vs. 12%. The bad news? That works out to about $1.55 per share for this year, or a good nickel short of what Wall Street wants to see. Let's hope the firm was pulling its punches when making that forecast. Else, 2008 could be a year rife with disappointment for shareholders.
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