Goldman Sachs Comments On Paychex Following Earnings; Shares Fall

Paychex

reported F3Q11EPS of $0.36, $0.01 above Goldman Sachs and the Street estimate of $0.35. Revenues finished at $531.3 mn vs. Goldman's estimate of $525.4 mn; including the SurePayroll acquisition recently completed. The average investment balance for funds held for clients finished at $3.7 bn vs. Goldman's $3.5 bn estimate, with an average interest yield of 1.3% vs. our 1.4%. Checks per client increased by 2.8%, above Goldman's 0.5% estimate while calendar year-end bonus activity experienced double-digit growth vs. F3Q10. However, new client sales were flat yoy, according to management, which suggests a sluggish start to the main selling season. With a sluggish start to its selling season, continued challenges in its core SMB market and increased competition, we see few catalysts for near-term acceleration in PAYX's growth profile. Although Goldman acknowledges steady metrics and an improved margin profile, it believes that current valuation of 22X CY11 EPS of $1.44 implies a faster earnings acceleration than currently possible given the required waterfall build of the model. Goldman Sachs has a Sell rating on PAYX PAYX is trading lower at $30.90