Deutsche Bank Reiterates Sell Rating on Paychex (PAYX)

Deutsche Bank is out with a brief research report this morning, where they reiterate their Sell rating on shares of Paychex PAYX; they have a $26.00 price target on the stock. DB analysts said, “We see Fiscal Year 4Q 2010 revenues of $490M (-1% Year over Year (YoY)) and EPS of $0.29 ($0.02 below Street). We model total services revs down 1% YoY, on 5th straight decline in payroll revs (-2.5% YoY) and tepid HRS (+3.5% YoY). And 2.5% YoY drop in client balances at 1.6% yield drive our 10% decline in float income. (The) market should pay most attention to FY2011 guidance, and could be disappointed if the PAYX outlook implies a more distant recovery, potential hangover effect from sub-par year-end selling season.” They noted, “Our Street low FY2011 estimates—revs of $2.0bn (flat YoY vs. Street +4%), op margins down YoY, EPS $1.26 (vs. Street $1.30)—reflect this view.” DB also said, “(The) board will soon decide whether to raise dividend, and failure to do so could be another negative near-term catalyst.” Deutsche Bank closed by saying, “PAYX’s underperformance over past 3 months may be due to weak year-end selling season and/or underwhelming pace of labor market recovery (sluggish payroll growth/stubbornly high initial unemployment claims). Although we expect more signs of stabilization—we see checks/client of -1% (vs. -2.2% last Q), new sales of -1% YoY (-4% last Q)—easier comps are likely to be main driver.” “Macro data is mixed: NFIB's small business optimism index at 92.2 in May is best reading since 9/08 but still at recessionary levels. Small biz failures have tapered off (Ch 11s -4% YoY in March Q vs. +8% in Dec Q), but small firms are still cutting down with avg. change in employment/firm at seasonally adj. -0.5 workers in May. And banks may be allocating money for small biz loans again, but our checks suggest tougher lending standards/lack of loan demand mean small biz aren't yet accessing those funds.”