Company Profile (excerpt from Reuters): Paychex, Inc., incorporated on April 26, 1979, is a provider of integrated human capital management (HCM) solutions for payroll, human resource (HR), retirement and insurance services for small- to medium-sized businesses in the United States. The Company also has operations in Germany. The Company offers services, including Payroll processing, Human Resource Services and Accounting and Financial Services. As of May 31, 2016, the Company serviced approximately 605,000 payroll clients. It offers a portfolio of HCM services and products that allows its clients to meet their payroll and HR needs. Its payroll-related ancillary services and human resource service (HRS) offerings often leverage the information gathered in the base payroll processing service, allowing it to provide outsourcing services covering the HCM spectrum. It also offers professional employer organization (PEO) services and provides insurance offerings through the Paychex Insurance Agency, Inc. (PIA).
Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$23,793,370,427||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||1.23||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||79.53%||Pass|
|6. Moderate PEmg Ratio||PEmg < 20||26.75||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||9.86||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||1.23||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||7.07%|
|MG Value based on 3% Growth||$35.86|
|MG Value based on 0% Growth||$21.02|
|Market Implied Growth Rate||9.12%|
|% of Intrinsic Value||118.10%|
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 $1.68 in 2015 to an estimated $2.47 for 2019. This level of demonstrated earnings growth does not support the market’s implied estimate of 9.12% 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 $18.85. The company pays a dividend of $2.06 per share, for a yield of 3.1%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 26.75, which was above the industry average of 26.19. Finally, the company was trading above its Net Current Asset Value (NCAV) of $1.97.
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)||$1.97|
|Number of Consecutive Years of Dividend Growth||5|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||11/1/2018|
|Total Current Assets||$5,290,000,000|
|Total Current Liabilities||$4,306,800,000|
|Shares Outstanding (Diluted Average)||361,500,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$2.80|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$2.47|
Other ModernGraham posts about the company
|Paychex Inc Valuation – March 2018 $PAYX|
|Paychex Inc Valuation – June 2016 $PAYX|
|Paychex Inc. Valuation – November 2015 Update $PAYX|
|Paychex Inc. Analysis – August 2015 Update $PAYX|
|30 Companies in the Spotlight This Week – 5/23/15|
Other ModernGraham posts about related companies
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.