A stagnant economic recovery and a nagging unemployment rate hovering above 9% certainly haven't helped human resources provider Paychex (Nasdaq: PAYX) this year. Despite the company posting quarterly profits and continuing to pay its hefty 4.4% dividend, its share price is down more than 11% in 2010, far worse than the broad market and its major competitors, Administaff (NYSE: ASF) and Automatic Data Processing (NYSE: ADP). While ADP focuses on larger businesses, Paychex caters to small and medium-sized enterprises -- those that have no doubt shouldered a large burden of the economic downfall.
However, there's plenty of reason to be bullish on Paychex, and I'll tell you exactly why.
Yes, the company reported that revenues increased by almost 2% for the latest quarter, and yes, checks per client improved as well -- both positive indicators.
But even more important is how Paychex makes a good portion of its money: It collects cash from customers, and in the interim period before it gets returned to clients for payroll processing, it obtains interest on what is called the "float." Look at the past five years of total revenue for the company:
Sure, it may not seem like interest income is that big of a component, but in 2008 the company made more than $100 million for essentially sitting on cash -- not exactly a bad business model. To put it into further perspective, check out how declining interest rates have affected the company in the past year.
In 2006, interest income represented almost 7% of total revenue; in 2007, it represented almost 8%. However, with the Fed keeping rates near zero to help spur economic growth, Paychex is unable to generate much income off of its float.
This can't go on forever. Eventually, the Fed is going to have to raise rates -- they have nowhere to go but up -- and when they do, companies like Paychex are going to reap the benefit.
I don't think the market is giving the company enough credit for what it can achieve over the long run, and for the incremental gains it's sure to reap when rates finally do rise.
What do you think? Is Paychex worth your investing dollars? Sound off in the comments box below.
