By IB Times Staff Reporter: Subscribe to IB's RSS feed
September 3, 2010 7:40 AM EDT
Barclays Capital reiterated its ‘equal weight’ rating on shares of payroll processor Paychex Inc. with a price target of $28. The brokerage finds the risk reward unattractive at the current valuation.
“We believe Paychex is a well-run company with good long-term prospects in the outsourced payroll/HR services market. However, the company's near-term prospects remain challenged by low interest rates, a weak U.S. employment recovery, and a small business focus that will likely result in flat year-over-year earnings and cash flows over the next year,” said Gary Bisbee, an analyst at Barclays Capital.
The analyst said Paychex recently issued its 10-K filing for the fiscal year ended May 31, 2010. While nothing earth shattering was disclosed in the 10-K, the analyst noted several observations following a detailed review of the filing.
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Net Payroll clients fell 3 percent year-over-year in fiscal 2010 due to the weak economy, but client counts continued to expand modestly in HR Services areas, Barclays Capital said in a report to clients.
The analyst said Paychex intends for 2 percent sales force headcount growth in fiscal 2011 (after 2 percent growth in fiscal 2010), driven primarily by hiring in the HR Services areas (largely insurance).
The analyst said the company’s cash flow from operations and free cash flow both fell 11 percent year-over-year, but remained healthy with $554 million of free cash flow, or 113 percent of net income.
After dividends, Paychex generated $108 million of excess cash flow, and it has $657 million of net cash. Paychex’s return on invested capital remains strong at 53 percent, or more than 5 time of its about 10 percent cost of capital, Barclays Capital said.
Paychex shares closed Thursday up 1.96 percent at $26.00 on the Nasdaq.
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