Paychex Customer Base Issues

Paychex (PAYX) issued results and correctly argued that with declining payrolls their revenues went down. Long term investors would therefore conclude that the stock is a proxy for bets on economic direction. Well sort of.

Take a look at their accounts receivable net of doubtful. The item increased by approximately $44 million or some 25% since May 31, 2009 a short six months ago. At the same time any top line metric is experiencing substantial declines. These two trend lines are alarming. When clients feel compelled to drag their payables for payroll services you know they are in sad shape. Accounts receivable now exceed income before tax.

As a jobless recovery may be taking root Paychex may have to make some decisions about its customer base and therefore may have to shrink some more.