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Paychex, Inc. Tempering Estimates Slightly to Reflect Slower Payroll Services Growth

Following the company’s conference call this morning, we are tempering our earnings projections slightly for Paychex. Management provided somewhat cautionary comments about its growth rate in the fiscal third quarter based on the continuing impact of Hurricane Sandy and a tough comparison (one extra payroll processing period last year because of the leap year). Specifically, management expects its payroll services revenue growth rate in the fiscal third quarter to remain at a similar level to the fiscal second quarter. This would imply a third consecutive quarter of 1%-2% growth in payroll services. It is also less than the 3%-4% growth rate that most people had expected.

Paychex’s management expects its payroll services revenue growth rate to pick back up in the fiscal fourth quarter, partly because of an easier comparison and some positive initial signs in the company’s key selling season (which typically runs from December through February). Management said that it has taken a little longer than expected to see an improvement in its sales activity this year, but the company has seen some encouraging results during the last two months. This commentary is somewhat encouraging, as it suggests that the recent slowdown in payroll services growth should improve in calendar 2013.

The net impact, though, is that we are decreasing our fiscal 2013 and 2014 EPS estimates by $0.01 each, to $1.59 and $1.71. Our projections assume continued strong growth in HRS revenue, continued solid operating leverage, and a slight pickup in payroll services revenue growth. We forecast a 3% growth rate for payroll services revenue for the fiscal fourth quarter and in fiscal 2014. This projection could be somewhat conservative if the selling season finishes strong, such that Paychex starts to see renewed client growth for its core payroll services. Given the slower growth during the last few quarters in payroll services, though, we believe a slightly more cautious approach is appropriate.

Our updated earnings model is shown on the following page.

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