There's no company that's rooting for an improving economy harder than Paychex (PAYX). After all, it's one of the businesses that benefits the most directly from climbing employment numbers and economic growth. Paychex is an outsourced HR firm that provides 570,000 small and medium-sized businesses with payroll and more specialized HR services. Because of the bevy of tax and compliance issues involved in a small business paying its people, the firm is able to earn profits for its expertise.
And as jobs numbers ratchet higher, so too do the fees that PAYX is able to collect.
Paychex's entrance into ancillary HR services came as a reaction to the economic problems of 2007 and 2008. As clients laid off employees or even closed up shop, Paychex was facing a revenue shortfall of its own. So the firm decided to push add-ons like 401k management and worker's comp insurance to its existing Rolodex. The strategy has worked -- and that leaves investors with a much more lucrative operation as jobs come back online.
The potential for rising interest rates should get PAYX investors salivating too. Historically, Paychex has earned substantial income from float interest -- the interest money it earns on massive payroll accounts in between the time that employers deposit funds and employees cash their checks. But with rates held near zero for the past five years, that revenue stream has dried up. While higher rates are likely further away than the Fed claims, it's an extra upside factor worth considering for longer-term investors.