Grim Outlook Could Hold Back Payroll Firms

DES MOINES, Iowa (AP) ⿿ Companies that process payroll for small business are feeling the pressure of a slumping economy and the diminishing confidence business owners have in short-term recovery.

The National Federation's Small Business Optimism Index slipped 0.9 percent in July, the fifth consecutive month-to-month decline. It fell to 89.9 in July from 90.8 in June.

Jefferies & Co. Inc. analyst Jason Kupferberg said this pessimism supports his cautious approach to small-business payroll providers.

Recent surveys have shown that just 2 percent of small-business owners plan to create jobs, down from 3 percent in June, indicating slow improvement in hiring. More owners in July said they expect business conditions to worsen over the next six months and more said loans are harder to obtain.

He maintained a "Hold" rating on Automatic Data Processing Inc. and Paychex Inc.

"The overall backdrop for the payroll processors remains challenging, as unemployment remains high and interest rates low," Kupferberg wrote in an investor note. "We continue to have concerns regarding the post-recession growth profile of both companies relative to historical levels, but these names could perform reasonably well in a more 'defensive' market, supported by ample dividend yields."

Shares of the major payroll providers advanced on Tuesday as the broader markets regained a portion of the losses witnessed on Monday. The Dow Jones industrial average lost more than 600 points Monday as the market responded to the Standard & Poor's downgrade of the U.S. long-term credit rating and debt problems in Europe.

ADP rose 80 cents, or 1.7 percent, to $46.47, and Paychex climbed 43 cents, or 1.7 percent, to $26.17.

CBIZ Inc. rose 14 cents, or 2 percent, and Insperity Inc. advanced 20 cents.

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