Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 10 Companies Benjamin Graham Would Invest In Today – MarchÂ 2016.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a stock analysis showing a specific look at how Paychex Inc (PAYX)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ 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 – June 2016
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||$19,448,591,543||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||1.09||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||28.25%||Fail|
|6. Moderate PEmg Ratio||PEmg < 20||29.75||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||10.54||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||1.09||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
|MG Growth Estimate||4.01%|
|MG Value based on 3% Growth||$26.59|
|MG Value based on 0% Growth||$15.59|
|Market Implied Growth Rate||10.62%|
|% of Intrinsic Value||180.14%|
Paychex, Inc. is suitable 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 concerned with the low current ratio. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $1.45 in 2012 to an estimated $1.83 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 10.62% 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.
Paychex, Inc. receives an average overall rating in the ModernGraham grading system, scoring a C.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||$0.86|
|Number of Consecutive Years of Dividend Growth||3|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||2/1/2016|
|Total Current Assets||$5,503,600,000|
|Total Current Liabilities||$5,039,200,000|
|Shares Outstanding (Diluted Average)||362,200,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$2.07|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$1.83|
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The author did not hold aÂ position in any company mentioned in this articleÂ at the time of publication and had no intention of changing that position within the next 72 hours. Â See my current holdings here. Â This article is not investment advice; any reader should speak to aÂ registeredÂ investment adviser prior to making any investment decisions. Â ModernGraham is not affiliated with the company in any manner. Â Please be sure to review our detailed disclaimer.
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