What These Two Companies Suggest About the Trend in Employment Payrolls

season is here and a number of companies have already reported. Some offer more useful information about the general economy and their earnings are a decent barometer. 

Paychex, Inc. (PAYX) is the second-largest U.S. payroll company. It just beat Wall Street consensus on revenues and earnings. 

The company said its fiscal third quarter of 2014 (ended February 28, 2014) saw revenues climb seven percent to $636.5 million, which is a very healthy comparable gain. 

Payroll service revenues grew five percent to $413.9 million, based on growth in checks per payroll and revenues per check. Human resource service revenues improved 12% to $212.1 million due to client-based growth. 

This produced a gain in bottom-line earnings of 11% to $160.1 million comparatively. Diluted earnings per share grew 10% to $0.44, up from the comparable figure of $0.40. Paychex reiterated existing revenue guidance for fiscal 2014. Earnings are expected to be higher than previously forecast. 

Decent growth at payroll companies is a positive sign. With an attractive dividend yield of approximately 3.3% currently, this stock has room to tick higher if the broader market doesn’t come apart. 

Paychex’s one-year stock chart is featured below: 

 

Chart courtesy of www.StockCharts.com 

Automatic Data Processing, Inc. (ADP) is slightly more than double Paychex’s market capitalization. 

This large-cap is trading only a few points from its all-time record-high, and it currently has a 2.5% dividend yield. 

The company doesn’t report its next set of earnings until April 30, but in its second fiscal quarter of 2014 (ended December 31, 2013), total sales climbed nine percent to $3.0 billion. (See “Stocks: Why I’m Starting to Favor the Second Half of 2014.”) 

Earnings were down slightly from $391 million to $377 million comparatively. ADP’s guidance last quarter was that fiscal 2014 should see revenue growth of between seven and eight percent, up from previous guidance of just seven percent. 

So the payroll business is going along pretty decently. These stocks are what I consider to be fully valued, but they have a tendency to remain that way. ADP’s normalized stock market return over the last 20 years is outstanding (the position got ahead of itself in 2000). 

If these two companies were to reduce their forward expectations, then this would be an important signal that the modest, but positive, trend in employment payrolls is reversing. Currently, however, the corporate data does not suggest this. 

More and more earnings reports will be hitting the wires with a deluge of numbers in a couple of weeks. 

Stocks have been choppy ever since the beginning of the year, and there’s typically a lull in sentiment between earnings seasons. 

I’m still highly reticent about this market and the trading is uninspiring to say the least. But last year’s performance was a lot to digest and some sectors, like biotechnology, did become frothy. 

This earnings season should produce more of what we’ve seen in recent quarters: modest numbers that might beat the Street on one financial metric (either revenues or earnings) with confirmation of previous guidance. 

Low-single-digit sales growth from blue chips should produce high-single-digit growth in the bottom-line. 

This article What These Two Companies Suggest About the Trend in Employment Payrolls was originally posted at Profit Confidential