Beating Buffett

After reporting flat May quarter earnings PAYX [$26.40] is trading at its lowest point in quite a while. Their business of computerized payroll and accounting services has been hurt by the general economic malaise but PAYX is debt-free, has a big yield and appears to have little risk left from today’s quote.

Here are the per share numbers since 2002 as reported by Value Line:

The dividend has been $0.31 quarterly since Q3 of 2008 and is unlikely to rise again until earnings pick up. It does look secure as the company has plenty of cash flow and no debt. The current yield is a juicy 4.69%.  

Zacks sees $1.45 for FY 2011- the current fiscal period ending May 31, 2011. That puts the forward multiple at 18.2x which is very low for PAYX based on all historical experience. A return to even 19 times this year’s estimate would bring PAYX back to $27.55. Standard and Poors has a 12-month target of $30 /share.

Here’s a nice 19-month buy/write combination that will provide a good total return even if PAYX shares do very little over that time frame.

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Automatic Data Processing (ADP) and Paychex (PAYX) are the dominant players in the payroll-accounting/tax filing processing space with Automatic Data serving mainly huge companies and Paychex targeting small to mid-size firms.

Each company is virtually debt free and both of them pay generous dividends by today’s standards. Value Line rates both companies at the 95^th percentile for ‘earnings predictability’ due to the recurring nature of their services. ADP and PAYX get outstanding marks for safety and ‘stock price stability’ as well. Each of them has a well below average Beta.

They are the epitome of high-quality, conservative, low-volatility shares. Both ADP and PAYX will likely have posted slightly lower EPS in their latest FY as revenues are tied to the nation’s total employed population.

Paychex earned $1.48 /share in the FY ended May 31 down from a record $1.56 /share in FY 2008. Automatic Data Processing actually set new record earnings of $2.35 in FY 2009 (ended June 30^th) versus their prior FY’s previous all-time high of $2.20 /share. These were very good performances considering the present economic climate.

Zacks now sees FY 2010 – 2011 earnings of $1.34 and $1.46 for PAYX and $2.35 and $2.51 for the current FY and into FY 2011 for ADP.

Here are the per-share* figures for ADP as reported by Value Line:

* ADP spun off its brokerage services in March 2007. Those operations accounted for $1.93 billion in FY 2006.

ADP now trades for $37.60 /share or 16x current year estimates. The well- covered dividend provides a 3.51% current yield. The P/E equals the lowest and the yield the highest in over twenty years (excluding the recent panic lows). In fact, ADP rarely has traded for < 20x earnings in its entire history.

A rebound to even 18x forward earnings of $2.35 would bring ADP back to $42.30 /share. Morningstar assigns a 4-Star rating (out of 5) to ADP shares and sees “fair value” as $51.

Automatic Data has actually traded at $41 and higher in each year since 1998. EPS back then were only $0.99 or less than half today’s level. The dividend in 1998 was $0.26 compared with $1.32 now.

Here’s a very conservative play with ADP that can still generate outstanding total return with very low risk. Read more…

Paychex, Inc. [NDQ:PAYX] March 25, 2009: $23.62
52-week range: $20.31 (March 3, 2009) - $37.47 (May 2, 2008)
Dividend = $0.31 quarterly = 5.25% current yield

Paychex provides computerized payroll-accounting, salary deposit, payroll tax payment, and tax return filing services to over 572,000 small and mid-size businesses in 36 states plus the District of Columbia. They also provide human resource product and services which account for about 24% of their top line revenues of about $2.1 billion.

This fiscal year’s earnings (years end May 31) are likely to show the first ever year-over-year decline in the company’s history due to the slow US economy and its accompanying decrease in total employee count among their customers. The share price has reflected this interruption in growth by falling about 50% from a 2007 high of $47.10 to today’s close of $23.62.

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