We recently discussed ADP’s (NASDAQ:ADP) increasing focus on small businesses that are creating the majority of the jobs in the U.S. even as economic uncertainty continues and unemployment remains a major concern. See our note titled ADP Goes for Small Businesses to Beat Dismal Jobs Reports. However, according to a recent survey performed by Paychex (NASDAQ:PAYX) subsidiary SurePayroll regarding small businesses in the New York Metropolitan area, these employers are feeling the pain from tighter budgets as evidenced by lower salaries.
We have a $56.65 Trefis price estimate for ADP, which is about 15% above the current market price.
Small Business Survey Uncertain Outlook
The SurePayroll survey was conducted on small businesses in the New York City metropolitan area and was based on payroll data from SurePayroll’s 32,000 customers. This report stated, “July statistics showed small businesses in the New York City metropolitan area grew their head count by 0.6 percent since the start of the year, while paycheck size dropped 1.3 percent.”  
While the declining paychecks do not directly impact top line of payroll processors like ADP and Paychex that charge a fixed fee, it does indicate that businesses are on a tighter budget and that spending could be constrained among small businesses. This could weigh on the profit margin outlook for small businesses and the propensity of small businesses to hire in the face of uncertain business conditions.
We wrote in our latest ADP note:
According to ADP’s report, small businesses have been increasingly hiring for nearly two years now. Companies with fewer than 50 employees added 58,000 jobs nationwide in July while businesses with 50 to 500 workers hired 47,000 people, according to the study. Only 9,000 new positions were at large firms with more than 500 staffers.  It is also worth noting that as much as 57% of July’s layoffs come from just five companies, implying that the job scenario at small businesses is actually not bad. 
While this survey represents a small sample set, the SurePayroll report strikes a more muted tone than the ADP report and suggests that small businesses are spending less on workers or that newly hired workers are earning less than their predecessors.
So while we like ADP fundamentally, we are still cautious on the assumption that small business hiring will make up for the slack in U.S. unemployment.Notes: