Stock Watch
Paychex: Investing in Jobs
An improving employment market will lift this payroll processor.
September 15, 2003
Between late 2000 and mid-2002, the shares of payroll processor Paychex (PAYX) dropped by two-thirds. But a surge in jobs would dispel investor concerns, and CEO John Morphy insists that Paychex has a bright future even if hiring improves just a little.
Paychex is one of two remaining large companies that process payrolls. Rival Automatic Data Processing caters mainly to giant corporations, whereas Paychex clients have an average of 14 employees. That's a critical difference because check processors' profit margins are higher for small clients than they are for giants. And once Paychex is in the door, it sells its small clients other services -- such as the administration of 401(k) plans -- that big employers often subcontract to specialists.
Paychex recorded ten straight years of 30%-plus profit gains until 2002, when growth slipped to 8%. The improving economy should push growth back to 10% or better in 2004. Higher interest rates would also help because Paychex collects income from investing the more than $2 billion in client payroll money it holds at any given time.
The stock sells at 44 times the calendar 2003 consensus profit estimate of 79 cents per share, compared with a price-earnings ratio of 19 for Standard & Poor's 500-stock index. That may seem dear, but Paychex shares have often commanded P/Es of 2.5 to 3.4 times that of the S&P.
--David Landis