Steady-as-she-goes for Paychex, and the economy

Posted Mar 29th 2007 6:05PM by Joseph Lazzaro
Filed under: Earnings Reports, Forecasts, Other Issues, Good news, FedEx Corp (FDX), United Parcel'B' (UPS)

On Wall Street, there are earnings reports, and then there are earnings reports that also serve as "data points of significance."

The "of significance" being, of course, the broader economy, and Paychex (NYSE: PAYX)'s Q3 earnings report Wednesday is an example of the latter.

Paychex reported Q3 EPS of 35c, which was in-line with the Reuters consensus estimate of 35c. PAYX also reported Q3 revenue of $485.3 million, which was slightly below the Reuters estimate of $488.3M.

In general, Wall Street responded favorably to the report, with Citigroup saying it still expects Paychex to generate 15%-16% growth in earnings in 2007; the bank also maintained its Buy rating and $49 target.

Wall Street follows Paychex's reports closely because its primary revenue stream -- payroll processing -- is levered to hiring and corporate staffing plans. Hence, Paychex serves as a "rough data point" for business hiring and business confidence. A substantial increase in demand for payroll services, particularly over quarters, points to economic expansion and robust economic activity. Conversely, a sharp decrease in Paychex's revenue suggests sluggish economic conditions may be ahead.

In other words, Paychex, like UPS (NYSE: UPS)'s deliveries (and those proverbial corrugated box orders) serve as 'canaries in a coal mine' for analysts, economists and traders.

Further, with an economic, money-flow, and trade environment that is dynamic and becoming more global in scope daily, Wall Street will take all of the relevant data points it can get to help gauge the economy's strength.

Tags: Paychex, UPS