Earnings Preview: Paychex

Paychex (PAYX) is expected to report Q4 earnings Thursday, June 26, after market close, with a conference call scheduled for Friday at 11:00 am ET.

Guidance

The consensus estimate is 38c for EPS and $529.62M for revenue, according to First Call. Citigroup expects a sequentially flat Q4 of 39c in EPS on a lower $30M float income versus $37M last quarter.

Analyst Views

Analysts are usually on top of this company. Over the past 10 quarters, Street estimates have been within a penny per share of actual bottom-line results. On the March 26 earnings call for Q3, management shared the following forecasts for FY08: It reaffirmed a 2008 revenue growth outlook of 9% to 11%; it expected growth in operating income of approximately 15% for FY08; it saw consistent growth in clients balances for FY08; and it expected average outstanding shares in FY08 to be approximately 370M.

Looking past FY08: Citigroup said investors have expressed concern to them recently around Paychex's upcoming FY09 guidance. Citigroup sees these concerns driven predominantly by expectations for broader slowing economic growth, slowing small business formation, and slowing small business employment and spending growth. The key issues for the Q4 call: FY09 guidance is most important, and trends in key payroll indicators such as pays per control and retention.

Thomas Weisel would expect FY09 guidance to reflect stabilizing interest rate assumptions with continued sluggish employment growth in the small-and-midsized business (SMB) segment. Weisel expects the FY09 guidance range to imply EPS of somewhere between $1.67 to $1.73 (up 7-11% YoY), which at the midpoint assumes a 2% Fed Funds rate and relative stability in rates throughout FY09, payroll growth in the mid to high single digits, continued margin expansion and a flat share count. Also, Weisel said, while not expected, the implementation of a share repurchase program is certainly possible given that the company has no specific need to build cash balances given their $408M in cash and investments, no debt, and given its strong and consistent free cash flow generation and its ability to borrow as needed.