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In Focus: Paychex
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December 20, 2000: 1:58 p.m. ET
Legg Mason analyst Matthew Roswell on Paychex and its competition
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NEW YORK (CNNfn) - Paychex Inc., which posted record profit Wednesday, is positioned to enjoy solid gains in the year ahead, but its high valuation may also prevent a run-up in its stock price, one analyst said.
Matthew Roswell, an IT business services analyst for Legg Mason and a guest on CNNfn's In Focus, said he believes the company's competitor, Ceridian, will emerge as the better stock pick in the payroll outsourcing sector, based on future price targets and its trading price today.
Paychex, he said, has "an excellent business model and a management team that's executing almost to perfection. Despite that, I have the stock rated at 'market perform based' on its valuation."
The Rochester, N.Y.-based company reported net income of $62.1 million, or 16 cents per diluted share, for the second quarter ended Nov. 30. That's up 36 percent over year-ago results of $45.8 million, or 12 cents a diluted share.
Revenue for the quarter reached $208 million, up 21 percent from $172 million last year.
The results beat analysts expectations by a penny, according to First Call.
For the six-month period, Paychex earned $121 million, or 32 cents per diluted share – also a 36 percent increase – on revenue of $412 million.
In Focus airs daily on CNNfn's network at 12:10 p.m. The following includes comments made both during the show and in the pre-show interview.
CNNfn: Paychex (PAYX: Research, Estimates) reported earnings of 16 cents per share, a 36 percent increase over the same time last year. Is that what you were expecting?
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The HR processing industry, which includes ADP, Ceridian and Paychex, will have a very good year next year. We see overall industry growth between 10-12 percent and that's including an economic slowdown in that estimate.
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Matthew Roswell, analyst, Legg Mason |
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Roswell: The numbers were in line with consensus and a penny above my number. It was a predominantly in-line quarter with very few negatives. The only piece that could have some people worried that earnings growth is slowing is that the company's core payroll revenue, excluding float income, grew 17 percent on an annual basis in the second quarter. That's down from the fiscal first quarter when it rose 18.6 percent on an annual basis.
Overall revenue was $208 million, up 21 percent year-over-year, and about $1.8 million above my expectations, so I'm treating it as an in-line revenue number.
That number includes payroll revenue excluding float income, float income, interest on client funds held, and a separate division called HRS-PEO. In the HRS-PEO division there are four main products – 401(k) administration services, workers compensation administration, employee leasing (that's the PEO part), and PAS - Paychex's administration services and outsourced HR dept.
CNNfn: Revenues for the HRS-PEO segment (Human Resource Services-Professional Employer Organization) increased 35 percent from last year; within HRS-PEO, which segments showed more strength?
Roswell: The one that fueled the growth was 401(k) administration, and investors are waiting to see which of the three others will be the next driver. I think it's going to be the PAS product -- the outsourced HR product -- because worker's comp is only an issue for a small percentage of companies.
You see worker's comp in industries where it's common to get hurt on the job, like construction, light and heavy industrial work, manufacturing, etc.
CNNfn: Were there any interesting developments this quarter?
Roswell: The company had incredible operating leverage in that corporate expenses only grew 2 percent year-over-year, while revenues grew 21 percent year-over-year, which means the company got more productive. They increased operating profit margins to 40 percent.
This is an excellent business model and a management team that's executing almost to perfection. Despite that, I have the stock rated at market perform based on its valuation.
CNNfn: At around $42 the stock is well below its 52-week high of $61-1/4. What's your outlook for the stock?
Roswell: The stock had a lot of momentum in it and reached a valuation level that wasn't sustainable, and over the past month we've been correcting that. I still think we have a ways to go in the correction, especially given the current market environment.
CNNfn: What's your outlook for the group?
Roswell: The HR processing industry, which includes Automatic Data Processing (ADP: Research, Estimates), Ceridian Corp. (CEN: Research, Estimates). and Paychex, will have a very good year next year. We see overall industry growth between 10 percent and 12 percent and that's including an economic slowdown in that estimate.
CNNfn: What's your favorite stock in the group?
Roswell: Ceridian (CEN: Research, Estimates), because of its valuation. PAYX is trading at 61 times next year's earnings, and ADP is at 36 times next year's earnings, while CEN is at 17 times. And CEN is spinning off a company called Arbitron -- they do to radio what Nielsen does to TV -- they do ratings. The spinoff will provide a catalyst for the shares to move higher. Our 12-month price target is $30, and the stock is at $21.25.
-- reported by Carmina Perez. Tanya Helenius contributed to this report. 
* Disclaimer
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