ModernGraham Valuation: Paychex, Inc. (PAYX)

moneyCompany Profile (obtained from Google Finance): Paychex, Inc. is a provider of payroll, human resource, and benefits outsourcing solutions for small to medium-sized businesses. As of May 31, 2012, the Company serviced approximately 567,000 clients, including approximately 2,000 clients through four offices in Germany. The Company offers a portfolio of services and products that allows its clients to meet their diverse payroll and human resource needs. These include payroll processing; payroll tax administration services; employee payment services; regulatory compliance services (new-hire reporting and garnishment processing); Paychex HR Solutions; retirement services administration; insurance services; eServices, and other human resource services and products. In January 2012, the Company acquired Icon Time Systems, Inc. In December 2012, the Company acquired ExpenseWire from Rearden Commerce Inc. In June 2013, Paychex Inc announced that it has acquired HR Services, Inc. and myStaffingPro.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $17.95
MG Opinion Overvalued
Value Based on 3% Growth $22.50
Value Based on 0% Growth $13.19
Market Implied Growth Rate 10.39%
Net Current Asset Value (NCAV) $1.11
PEmg 29.27
Current Ratio 1.13
PB Ratio 9.40

Balance Sheet – 11/30/2013 

Current Assets $4,663,800,000
Current Liabilities $4,119,100,000
Total Debt $0
Total Assets $6,019,400,000
Intangible Assets $583,600,000
Total Liabilities $4,259,000,000
Outstanding Shares 364,200,000

Earnings Per Share

2014 (estimate) $1.67
2013 $1.56
2012 $1.51
2011 $1.42
2010 $1.32
2009 $1.48
2008 $1.56
2007 $1.35
2006 $1.22
2005 $0.97
2004 $0.80
2003 $0.78

Earnings Per Share – Modern Graham 

2014 (estimate) $1.55
2013 $1.48
2012 $1.45
2011 $1.42
2010 $1.41
2009 $1.41

Conclusion:

Paychex, Inc. is an interesting company.  On the one hand, it has no long-term debt, but on the other hand it has a lot of current liabilities.  As a result, the current ratio is relatively poor but the company still passes the requirements of the Enterprising Investor.  The Defensive Investor has a lower risk tolerance, and the company does not pass his requirements due to the poor current ratio as well as high PEmg and PB ratios.  Enterprising Investors should feel comfortable proceeding with further research, perhaps by reviewing this month’s issue of ModernGraham Stocks & Screens or some Undervalued Companies we reviewed last weekend to find other companies that may be suitable for investment.  From a valuation perspective, the company appears to be overvalued at the current time.  EPSmg (normalized earnings) have only grown from $1.41 in 2009 to an estimated $1.55 for 2014.  This is a very low level of growth that has been achieved in the historical period, and does not support the market’s implied growth rate of 10.39%.

What do you think?  Do you agree that Paychex, Inc. is overvalued?  What would be your assessment?  Is the company suitable only for Enterprising Investors?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Paychex, Inc. (PAYX) at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill


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