Stock Analyst Notes
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Paychex PAYX reported first-quarter results that were in line with our expectations and we are maintaining our fair value estimate. The operating environment seems to be improving for Paychex as the employment market and the overall economy begin to stabilize. Total revenue for the first quarter of fiscal 2010 declined 6% year over year; however, on a quarterly sequential basis revenue grew approximately 1%. The combination of a lower average employee headcount for the firm's customers, an increased rate in businesses closures, and a dramatically lower interest rate environment have created a major head wind that has impaired growth, but the torrid pace of decline for these metrics has improved significantly. Profitability also took a hit as deleveraging and lower float income hurt the bottom line. Operating margins compressed to 38% from 41% year over year. However, this metric also improved on a quarterly sequential basis from 35%. We believe the improving sequential results for both revenue and profitability point to the beginning of a solid recovery for the firm over the course of fiscal 2010.
Paychex's human resources service division continued to show solid resilience. Revenue grew 1% year over year as most service offerings experienced positive trends. These services are mainly marketed and provided to existing payroll clients. We believe payroll clients that have been able to weather the current economic storm are looking to leverage these ancillary services in order to try and boost their own operational efficiency and profitability during the current economic downturn.
The firm's income from float (interest earned as a result of the lag between when Paychex receives payroll-related funds from its clients and when it pays its clients' employees or other entities) fell 43% year over year as short-term interest rates were significantly lower compared with last year. Since revenue from the float portfolio has minimal expenses, firmwide operating margins are affected materially with the fluctuation of float income. However, we expect the deep year-over-year revenue declines in the float portfolio to dissipate over the course of fiscal 2010 as the company laps the historically low interest rates of the past year. Management also mentioned that it is beginning to move into slightly higher-yielding securities as the credit markets have shown signs of sustainable stabilization.
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