) reported fourth-quarter fiscal 2013 earnings of 34 cents per
share, missing the Zacks Consensus Estimate by 8.1%. The
quarter's result was roughly flat year over year.
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Paychex reported fourth-quarter 2013 revenues of $585.3 million,
up 6.1% from $551.5 million in the year-ago quarter. The
quarter's revenues were below the Zacks Consensus Estimate of
Payroll Service segment revenues increased 3.5% year over year to
$382.6 million. Checks per payroll grew roughly 0.9% from the
year-ago quarter. Revenue per check grew modestly as a result of
price increases, partially offset by discounting. Client
retention rate was satisfactory.
The Human Resource Services segment generated $192.7 million in
revenues, up 12.6% from the prior-year quarter. The improvement
was mainly attributable to small market client growth and price
increases, partially offset by lower contribution from
professional employer organization.
In the fourth quarter, Paychex incurred total expenses of $373.5
million, up 5.0% from the year-ago quarter. The rise was mainly
due to higher selling, general and administrative expenses as
well as continuous investments in product development and
Operating income was $211.8 million, up 8.1% from the year-ago
period, attributable to modest revenue growth supported by better
cost management and capacity utilization. Operating margin was
40.5% versus 39.5% in the year-ago quarter.
Net income of $123.5 million or 34 cents per share was roughly
flat year over year. There was no one-time item during the
quarter. During the quarter, Paychex recorded higher tax
provision for the settlement of a state income tax matter.
Balance Sheet & Cash Flow
Paychex exited the fourth quarter with cash and cash equivalents
of $107.3 million, up from $100.4 million at the end of the prior
quarter. Corporate investments were $398.2 million compared with
$470.2 million in the prior quarter.
Additionally, interest on funds held for clients decreased 7.4%
year over year to $10.0 million as a result of lower average
interest rates earned, partly offset by an increase in average
investment balances. Paychex has no long-term debt.
Paychex believes that Payroll Services revenue growth will be
supported by modest growth in client base and improved revenue
per check. Human Resources organic revenue growth is expected to
follow the historical trend.
For fiscal 2014, Paychex expects a 3-4% increase in Payroll
Service revenues from the year-ago quarter. Human Resource
Services revenues are expected to increase in the range of 9.0%
Total service revenue will likely grow in the range of 5% to 6%.
The company expects a 9-7% decline in interest on funds held for
clients and 0-5% upside in net investment income.
Interest on funds held for clients and investment income for
fiscal 2014 are expected to be impacted by the low interest rate
environment. However, investment of cash generated from
operations is expected to persist, thus increasing investment
Net operating income as a percentage of service revenues is
expected to be 38.0% for fiscal 2014. The effective income tax
rate for fiscal 2014 is expected in the range of 36%-37%. Net
income is expected to grow in the range of 8% to 9%.
Paychex' fourth quarter results were disappointing with both the
bottom and top lines missing the Zacks Consensus Estimate.
Revenue growth is being adversely affected by inadequate hiring
by small and medium businesses. Paychex also provided fiscal 2014
guidance, which we believe is in line with the continuing macro
We are encouraged by management's commentary regarding continued
investments in product development and focus toward building
sales force to support revenue growth. We also believe that the
recent acquisition of HR Services Inc. and new product launches
would provide additional support.
Despite strict interest rates and stiff competition from
Automated Data Processing
) and Insperity, Paychex' zero European exposure will be
beneficial for the company.
Currently, Paychex has a Zacks Rank # 2 (Buy). Investors should
also look into similar stocks that are performing better than
Portfolio Recovery Associates Inc.
Sykes Enterprises Inc.
) both have a Zacks Rank #1 (Strong Buy) and are worth