Paychex Inc. Valuation – November 2015 Update $PAYX

Benjamin 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 10 Most Undervalued Companies for the Defensive Investor – November 2015.  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 stock analysis showing 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 integrated payroll, human Resource, insurance, and benefits outsourcing solutions for small- to medium-sized businesses. The Company focuses on providing payroll and human Resource services; delivering these services; growing its client base, through the efforts of its direct sales force; improving client service, through its leading-edge technology; capitalizing on the growth opportunities within its existing client base and from new clients; investing in business through expansion of its services and product offerings; and supplementing its growth through strategic acquisitions. The Company offers services and products that allow 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; Paychex HR Services; retirement services administration; insurance services; and online HR administration services.


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Downloadable PDF version of this valuation:

ModernGraham Valuation of PAYX – November 2015

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $19,288,891,124 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.13 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 26.42% Fail
6. Moderate PEmg Ratio PEmg < 20 29.60 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 10.84 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.13 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.00 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

PAYX value Chart November 2015

EPSmg $1.81
MG Growth Estimate 3.73%
MG Value $28.85
Opinion Overvalued
MG Value based on 3% Growth $26.21
MG Value based on 0% Growth $15.36
Market Implied Growth Rate 10.55%
Current Price $53.50
% of Intrinsic Value 185.45%

Paychex Inc. qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the low current ratio, insufficient earnings growth over the last ten years, and the high PEmg and PB ratios.  The Enterprising Investor is only initially concerned by the low current ratio.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $1.45 in 2012 to an estimated $1.81 for 2016.  This level of demonstrated earnings growth does not support the market’s implied estimate of 10.55% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

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 Inc. (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.

Stage 3: Information for Further Research

PAYX Charts November 2015

Net Current Asset Value (NCAV) $1.09
Graham Number $14.92
PEmg 29.60
Current Ratio 1.13
PB Ratio 10.84
Dividend Yield 2.92%
Number of Consecutive Years of Dividend Growth 3



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Most Recent Balance Sheet Figures

Balance Sheet Information Aug15
Total Current Assets $4,588,200,000
Total Current Liabilities $4,046,400,000
Long-Term Debt $0
Total Assets $5,983,000,000
Intangible Assets $594,500,000
Total Liabilities $4,192,200,000
Shares Outstanding (Diluted Average) 362,800,000

Earnings Per Share History

Next Fiscal Year Estimate $1.99
May15 $1.85
May14 $1.71
May13 $1.56
May12 $1.51
May11 $1.42
May10 $1.32
May09 $1.48
May08 $1.56
May07 $1.35
May06 $1.22
May05 $0.97
May04 $0.80
May03 $0.78
May02 $0.73
May01 $0.68
May00 $0.51
May99 $0.37
May98 $0.28
May97 $0.21
May96 $0.15

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $1.81
May15 $1.68
May14 $1.57
May13 $1.48
May12 $1.45
May11 $1.42
May10 $1.41
May09 $1.41
May08 $1.31
May07 $1.13
May06 $0.98
May05 $0.84
May04 $0.75
May03 $0.68
May02 $0.59
May01 $0.49
May00 $0.36

Recommended Reading:

Other ModernGraham posts about the company

Paychex Inc. Analysis – August 2015 Update $PAYX
30 Companies in the Spotlight This Week – 5/23/15
Paychex Inc. Quarterly Valuation – May 2015 $PAYX
27 Companies in the Spotlight This Week – 2/14/15
Paychex Inc. Quarterly Valuation – February 2015 $PAYX

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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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