Thursday, March 19, 2015

Cash in with Paychex

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It looks very much like American investors are hunkering down and looking for value, after a week that saw a a decline of almost 3 percent in the U.S. gross domestic product during the first quarter of 2014, and after hints the Federal Reserve will hike interest rates in early 2015 to combat rising inflation.

That's where good, old-fashioned value investing – the term that made Warren Buffett famous – comes into play these days. Why Buffett? He is the classic "slow and steady wins the race" investor, and he habitually seeks to take risk out of the equation with his stock picks.

That's the model investors want to emulate now, especially with the economy in such a precarious position, and one value play that stocks to the script is Paychex (NASDAQ: PAYX), the Rochester, N.Y.-based provider of payroll, human resource, and benefits outsourcing solutions for small- to medium-sized businesses.

Why Paychex? The stock is exactly the type of steady, dependable growth company that investors want and need in a risk-heavy trading environment.

A thumbnail sketch of what exactly Paychex does is a good indicator of why it fits the value model right now. It's the boring, but money-making, model that businesses absolutely have to have to keep their finances in order, and Paychex does it all in a thorough and efficient way.

This from the company's web site:

The company offers payroll processing services that include the calculation, preparation, and delivery of employee payroll checks; production of internal accounting records and management reports; preparation of federal, state, and local payroll tax returns; and collection and remittance of clients' payroll obligations. It also provides a software-as-a-service solution to meet the payroll and human resource administrative needs; a suite of self-service online payroll services and products, including Paychex Online Payroll, Inte! rnet time sheet, online reports, and general ledger reporting service; payroll tax administration services; employee payment services; and regulatory compliance services, such as new-hire reporting and garnishment processing.

Yes, Paychex isn't the only major provider of these serves, but of all the major players in its industry, the company offers a trading value competitors like American Data Processing and TriNet Services don't.  Currently, Paychex is trading at 24 times earnings, compared to ADP's 27 times earnings and TriNet trading at a staggering 156 times earnings.

Paychex is currently trading at $41 per share, and offers a nice bonus – a 3.4 percent dividend payout that should keep skittish investors happy while the economy – and the market – sort themselves out.

That share price should rise thanks to another solid quarter of earnings growth, as Paychex just released Q4 and fiscal 2014 results. Here's a quick snapshot:

Total service revenue increased six percent for the fourth quarter; and six percent for the full fiscal year 2014.Payroll service revenue increased three percent for the fourth quarter; and four percent for fiscal 2014.Human Resource Services revenue increased 10 percent for the fourth quarter; and 12 percent for fiscal 2014.Total revenue increased five percent for the fourth quarter; and five percent for fiscal 2014.Operating income increased eight percent for the fourth quarter; nine percent for fiscal 2014.

Q4 earnings clocked in at 40 cents per share, right in line with most analysts' estimates, and on a year-to-year basis, earnings per share rose by 18 percent. Growth in two key categories – payroll services and human resources services were both up for the quarter (HR by 21 percent on a year-to-year basis), signaling continued healthy outcomes in area where Paychex excels, and where companies need good financial services providers.

Paychex also issued some forward-looking guidance this week, as well. The company's outlook! has a 5 ! percent hike in payroll services and human resources services are expected to continue to roll, at 19 percent growth. That's a fairly bullish outlook for a company that seems to be churning smoothly through turbulent economic times.

 So here's a vote for a very Buffett-like value play – Paychex – a rock of a stock in an uneven economy.

Brian O'Connell is an investment analyst at Investing Daily. He has appeared as an expert financial commentator on CNN, NPR, Fox News, Bloomberg, CNBC, C-Span, CBS Radio, and many other media broadcast outlets.

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