Paychex Inc Valuation – March 2018 $PAYX

Company Profile (obtained from Marketwatch): Paychex, Inc. engages in the provision of payroll, human resource, insurance, and benefits outsourcing solutions for small and medium sized businesses. It offers payroll processing, payroll tax administration services, employee payment services, regulatory compliance services, Paychex HR Solutions, retirement services administration, insurance services, and eServices and other human resource services and products. The company was founded by Blase Thomas Golisano in 1971 and is headquartered in Rochester, NY.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of PAYX – March 2018

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 $23,893,018,387 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 59.24% Pass
6. Moderate PEmg Ratio PEmg < 20 30.63 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 12.21 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

EPSmg $2.17
MG Growth Estimate 5.81%
MG Value $43.72
Opinion Overvalued
MG Grade C+
MG Value based on 3% Growth $31.49
MG Value based on 0% Growth $18.46
Market Implied Growth Rate 11.06%
Current Price $66.52
% of Intrinsic Value 152.17%

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, 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 $1.57 in 2014 to an estimated $2.17 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 11.06% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Paychex, Inc. revealed the company was trading above its Graham Number of $17.07. The company pays a dividend of $1.84 per share, for a yield of 2.8%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 30.63, which was below the industry average of 35.6, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $0.77.

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) $0.77
Graham Number $17.07
PEmg 30.63
Current Ratio 1.09
PB Ratio 12.21
Current Dividend $1.84
Dividend Yield 2.77%
Number of Consecutive Years of Dividend Growth 4

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Most Recent Balance Sheet Figures

Balance Sheet Information 11/1/2017
Total Current Assets $5,993,000,000
Total Current Liabilities $5,501,700,000
Long-Term Debt $0
Total Assets $7,684,600,000
Intangible Assets $775,500,000
Total Liabilities $5,715,700,000
Shares Outstanding (Diluted Average) 361,400,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $2.38
May2017 $2.25
May2016 $2.09
May2015 $1.85
May2014 $1.71
May2013 $1.56
May2012 $1.51
May2011 $1.42
May2010 $1.32
May2009 $1.48
May2008 $1.56
May2007 $1.35
May2006 $1.22
May2005 $0.97
May2004 $0.80
May2003 $0.78
May2002 $0.73
May2001 $0.68
May2000 $0.51
May1999 $0.37
May1998 $0.28

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $2.17
May2017 $2.01
May2016 $1.84
May2015 $1.68
May2014 $1.57
May2013 $1.48
May2012 $1.45
May2011 $1.42
May2010 $1.41
May2009 $1.41
May2008 $1.31
May2007 $1.13
May2006 $0.98
May2005 $0.84
May2004 $0.75
May2003 $0.68
May2002 $0.59

Recommended Reading:

Other ModernGraham posts about the company

Paychex Inc. Valuation – November 2015 Update $PAYX
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

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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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