Paychex (NASDAQ: PAYX) is set to report Q1 FY ’13 earnings later today. It reported total revenues of $2.2 billion for fiscal year 2012, an increase of 7% from the $2.1 billion it had posted for FY 2011. During its last quarter, the company’s operating income also increased approximately 7% to $196 million from $183 million the previous year. Because Paychex’s revenues are dependent on the number of individuals employed across the US economy, we will be closely watching whether or not a weak job market has impacted the company’s performance over the last three months. 
According to our model, the company’s value consists of two divisions; Payroll Services and Human Resource Services. Both of these divisions are dependent on employment growth in the country, and the revenue per client is correlated with the number of employees that they have on their payrolls.
One of the biggest drivers in the Payroll Services division, which is the average number of employees per payroll client and constitutes approximately 70% of the company’s value. If the slow growth in the US job market has also dented employment growth within Paychex’s client base during the quarter, we could see downside to our forecasts and consequently our price estimate. You can assess the impact that slower growth in US employment will have on Paychex’s value by using our tool below.
Paychex is focusing simplifying payroll processing services for small and medium businesses with SaaS-based mobile solutions such as Paychex Online mobile. While the employment picture remains bleak, it must innovate and simplify its platforms if it wants to have any chance at growing its client base. If it is successful on this front, the increase in the number of payroll clients could partially offset any downside impact due to a bleak employment picture. Therefore, we will also be closely monitoring any new product announcements that the company might make along with its earnings announcement.
We currently have a $33.30 price estimate for PAYX, which is approximately 4% below the current market price.Notes: