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Cramer: Think rates are going up? Then bet on this

Jim Cramer is scratching his head and wondering—what the heck happened to Paychex?

This company is the second largest payroll processor in the United States, with a specialization in small- to mid-sized businesses. So, one would think that if employment in the U.S. gains, Paychex would be, too.

However, the company reported on Wednesday, and the stock was slammed, down 4 percent by the end of the day. Cramer suspects that some of the drop can be attributed to the fact that it ran up a bit into the quarter.

It reported in-line earnings and higher than expected revenues, but there were a few numbers that investors found disappointing.

Paychex's core payroll revenue growth was below the low end of its full-year guidance range, and its checks per client increased by less than 1 percent for the quarter. Additionally, management described its growth going forward as "moderate"—not a great sign, Cramer said.

"At this point a bet on Paychex is a bet on higher interest rates," said the "Mad Money" host.





Paychex Access payroll card in Brookline, Mass.
Pat Greenhouse | The Boston Globe | Getty Images
Paychex Access payroll card in Brookline, Mass.

This is because Paychex collects interest on wages from the time that it cuts a paycheck to the time that it is cashed.

Could the looming threat of interest rates and tax reform impact Paychex' growth this year? To find out, Cramer spoke with Paychex CEO Martin Mucci.

"I think that small businesses may have led the way a little bit in the job growth. We were stronger a bit last year; it's moderated some. I still think it is positive," Mucci said.

The CEO clarified that he thinks growth could have been impacted by some clients who chose to leave Paychex to try a cheaper or more automated solution that features automated software as a service platform, known as SaaS.

"I think what people are seeing are that they are trying someone else maybe in the short term, but what they're not getting is the service and the full breadth of the products that we offer," he said.

Mucci added that the company saw strong job additions in the U.S. in the beginning of the year that have now slowed down, as small businesses have become more cautious due to the Affordable Care Act and tax reforms.

"I think what you're seeing is more like if I have a couple of pizza places, I may not open that next one. I may just be careful to expand a little bit," Mucci said.

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This would also explain why Paychex statistics indicate an increase in part-time employment, as tax reform and the Affordable Care Act will cost them money. However he has not seen that the new regulations have prevented any small businesses from opening, only that it has created an environment of caution.

"The moderation is really in the check-growth, that's checks per payroll. That has slowed down, so the hiring of the existing clients tended to moderate and not grow as fast. I think it grew faster early and then started to moderate out," he said.

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