Paychex Inc. Quarterly Valuation – July 2014 $PAYX

500px-Paychex_logo.svgBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies to Research for the Enterprising Investor.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Paychex Inc. (PAYX) fares in the ModernGraham valuation model.

Company 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 June 2014, the Company acquired nettime solutions, LLC, cloud-based time and attendance solutions provider.
PAYX Chart

PAYX data by YCharts

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

Key Data:

Recent Price $42.39
MG Value $18.55
MG Opinion Overvalued
Value Based on 3% Growth $22.70
Value Based on 0% Growth $13.31
Market Implied Growth Rate 9.29%
Net Current Asset Value (NCAV) $1.15
PEmg 27.08
Current Ratio 1.13
PB Ratio 8.66

Balance Sheet – 3/31/2014

Current Assets $5,011,400,000
Current Liabilities $4,438,900,000
Total Debt $0
Total Assets $6,370,100,000
Intangible Assets $580,900,000
Total Liabilities $4,593,100,000
Outstanding Shares 363,000,000

Earnings Per Share

2014 $1.71
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

Earnings Per Share – ModernGraham

2014 $1.57
2013 $1.48
2012 $1.45
2011 $1.42
2010 $1.41
2009 $1.41

Dividend History

PAYX Dividend Chart

PAYX Dividend data by YCharts

Conclusion:

Paychex is suitable for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor has concerns with the low current ratio and the high PEmg and PB ratios.  The Enterprising Investor’s only initial concern is with the high level of debt relative to the current assets.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities including a review of ModernGraham’s valuation of Automatic Data Processing (ADP).  As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $1.41 in 2010 to only $1.57 for 2014. This low level of demonstrated growth does not support the market’s implied estimate of 9.29% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.

Be sure to check out the previous ModernGraham valuations of Paychex Inc. (PAYX) for more perspective!

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Paychex (PAYX)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Paychex Inc. (PAYX) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.


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Comments

2 responses to “Paychex Inc. Quarterly Valuation – July 2014 $PAYX”

  1. Dano Avatar
    Dano

    How do you square the conclusion that the E Investor’s major concern is the debt level relative to assets when the company has no debt?

    1. Benjamin Clark Avatar

      The company has no long-term debt but has a high level of current liabilities.

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