Companies that cater to small and mid-sized businesses are a good barometer for the overall economic environment. As a major player in payroll processing and other HR services for such businesses, Paychex
Unfortunately for those looking for a strong recovery, the company's fiscal second-quarter results were fair to middling. Total service revenue fell 4% to $483 million, and earnings slipped 10% to $125.8 million, or $0.35 per share. That's pretty much what Paychex management had expected, and the company hasn't changed its outlook for the full 2010 fiscal year, which will end next May.
You knew that would happen
This news shouldn't come as a surprise to investors. Companies still aren't hiring. According to Haver Analytics, only 8% of all companies had one or more job openings in December, the lowest such figure for that statistic since 1982.
At the same time, there's been a lot of talk coming out of Washington about enacting policies that would bolster small-business growth. Such measures don't seem to be reflected in the company's expectations yet. However, if anyone stands to gain from the fulfillment of such promises, it's Paychex.
Paychex remains independent of the employment fluctuations among the workforces of major employers like Wal-Mart
In the meantime, Paychex can afford to wait, even if small business doesn't get the jump-start it's hoping for. With no debt, $225 million in cash providing a nice working capital cushion, and a proven knack for generating consistent free cash flow, it's a relatively bombproof company.
The most troublesome aspect about Paychex, perhaps, is its premium valuation. It currently trades at around 22 times trailing and forward earnings, which is quite a bit higher than what competitor Automatic Data Processing
But if you're willing to pay up for a strong stock, Paychex is definitely worth a look. And if you'd rather not pay top dollar for shares right now, waiting for future political uncertainties or news of further economic difficulties might create more attractive buying opportunities. If Bill Gross is right, it may not be too long before such an opportunity comes along.
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