After the markets closed on Wednesday, March 26, Paychex (NASDAQ:PAYX) reported better-than-expected fiscal third-quarter results. Revenue growth was better than expected, and EPS were $0.02 above the consensus estimate. Management maintained its revenue guidance for 2014, but slightly increased its net income guidance (up 9%-10%, compared with previous guidance of 8%-9% growth).
Paychex’s payroll services growth of 5% inched up slightly from last quarter, and set a new high for what we have seen post-recession. We would caution that a portion of the improved growth is attributable to an easy comparison (one more billing day than last year)—the two-year compounded growth rate for the fiscal third quarter is 3.5%, up from 3.2% growth last quarter. Management’s commentary in the press release also suggests that the bulk of payroll services growth still came from higher revenue per check (price increases, cross-selling) and checks per client, so the improved growth is not yet being driven by improved client growth, which we believe would be particularly encouraging to investors.
Either way, the growth of payroll services in the fiscal third quarter should be reassuring. Paychex also continues to report strong growth in HRS revenue (particularly in retirement and PEO solutions) and consistently improving profit margins. The company repurchased stock for the third conservative quarter, which suggests that it might continue to do so on a regular basis. The interest rate environment has still not turned more favorable, and we still would like client growth to improve more, but Paychex appears on track to continue delivering high-single-digit underlying earnings growth.
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