Intrinsic value of Paychex, Inc. - PAYX

Previous Close

$78.44

  Intrinsic Value

$57.45

stock screener

  Rating & Target

sell

-27%

Previous close

$78.44

 
Intrinsic value

$57.45

 
Up/down potential

-27%

 
Rating

sell

We calculate the intrinsic value of PAYX stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 0001), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 28.2

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   2
   3
   4
   5
   6
   7
   8
   9
   10
   11
   12
   13
   14
   15
   16
   17
   18
   19
   20
   21
   22
   23
   24
   25
   26
   27
   28
   29
   30
   31

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  7.00
  6.80
  6.62
  6.46
  6.31
  6.18
  6.06
  5.96
  5.86
  5.77
  5.70
  5.63
  5.56
  5.51
  5.46
  5.41
  5.37
  5.33
  5.30
  5.27
  5.24
  5.22
  5.20
  5.18
  5.16
  5.14
  5.13
  5.12
  5.10
  5.09
Revenue, $m
  3,618
  3,864
  4,119
  4,385
  4,662
  4,950
  5,251
  5,563
  5,889
  6,230
  6,584
  6,955
  7,342
  7,746
  8,169
  8,611
  9,074
  9,558
  10,064
  10,595
  11,150
  11,732
  12,342
  12,981
  13,651
  14,353
  15,089
  15,861
  16,671
  17,520
Variable operating expenses, $m
  2,189
  2,332
  2,480
  2,634
  2,794
  2,961
  3,134
  3,315
  3,504
  3,701
  3,811
  4,025
  4,249
  4,483
  4,728
  4,984
  5,252
  5,532
  5,825
  6,132
  6,453
  6,790
  7,143
  7,513
  7,900
  8,307
  8,733
  9,180
  9,648
  10,140
Fixed operating expenses, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  2,189
  2,332
  2,480
  2,634
  2,794
  2,961
  3,134
  3,315
  3,504
  3,701
  3,811
  4,025
  4,249
  4,483
  4,728
  4,984
  5,252
  5,532
  5,825
  6,132
  6,453
  6,790
  7,143
  7,513
  7,900
  8,307
  8,733
  9,180
  9,648
  10,140
Operating income, $m
  1,428
  1,532
  1,640
  1,752
  1,868
  1,990
  2,116
  2,248
  2,385
  2,529
  2,774
  2,930
  3,093
  3,263
  3,441
  3,627
  3,822
  4,026
  4,240
  4,463
  4,697
  4,942
  5,199
  5,468
  5,750
  6,046
  6,356
  6,681
  7,022
  7,380
EBITDA, $m
  1,620
  1,731
  1,845
  1,964
  2,088
  2,217
  2,352
  2,492
  2,638
  2,790
  2,949
  3,115
  3,289
  3,470
  3,659
  3,857
  4,064
  4,281
  4,508
  4,746
  4,994
  5,255
  5,528
  5,814
  6,114
  6,429
  6,759
  7,104
  7,467
  7,847
Interest expense (income), $m
  0
  0
  21
  43
  66
  89
  114
  139
  166
  194
  223
  253
  284
  317
  352
  388
  425
  464
  505
  548
  593
  640
  690
  741
  796
  852
  912
  974
  1,039
  1,108
  1,180
Earnings before tax, $m
  1,428
  1,511
  1,597
  1,686
  1,779
  1,876
  1,977
  2,082
  2,192
  2,306
  2,521
  2,645
  2,776
  2,912
  3,054
  3,202
  3,358
  3,521
  3,691
  3,870
  4,057
  4,252
  4,458
  4,673
  4,898
  5,134
  5,382
  5,642
  5,914
  6,200
Tax expense, $m
  386
  408
  431
  455
  480
  507
  534
  562
  592
  623
  681
  714
  749
  786
  825
  865
  907
  951
  997
  1,045
  1,095
  1,148
  1,204
  1,262
  1,322
  1,386
  1,453
  1,523
  1,597
  1,674
Net income, $m
  1,043
  1,103
  1,166
  1,231
  1,299
  1,370
  1,443
  1,520
  1,600
  1,683
  1,840
  1,931
  2,026
  2,125
  2,229
  2,338
  2,451
  2,570
  2,695
  2,825
  2,961
  3,104
  3,254
  3,411
  3,576
  3,748
  3,929
  4,119
  4,318
  4,526

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  8,472
  9,048
  9,647
  10,270
  10,919
  11,594
  12,297
  13,029
  13,793
  14,589
  15,420
  16,288
  17,195
  18,142
  19,132
  20,167
  21,250
  22,384
  23,570
  24,812
  26,113
  27,476
  28,904
  30,400
  31,969
  33,613
  35,337
  37,145
  39,041
  41,030
Adjusted assets (=assets-cash), $m
  8,472
  9,048
  9,647
  10,270
  10,919
  11,594
  12,297
  13,029
  13,793
  14,589
  15,420
  16,288
  17,195
  18,142
  19,132
  20,167
  21,250
  22,384
  23,570
  24,812
  26,113
  27,476
  28,904
  30,400
  31,969
  33,613
  35,337
  37,145
  39,041
  41,030
Revenue / Adjusted assets
  0.427
  0.427
  0.427
  0.427
  0.427
  0.427
  0.427
  0.427
  0.427
  0.427
  0.427
  0.427
  0.427
  0.427
  0.427
  0.427
  0.427
  0.427
  0.427
  0.427
  0.427
  0.427
  0.427
  0.427
  0.427
  0.427
  0.427
  0.427
  0.427
  0.427
Average production assets, $m
  839
  896
  956
  1,017
  1,082
  1,149
  1,218
  1,291
  1,366
  1,445
  1,528
  1,614
  1,703
  1,797
  1,895
  1,998
  2,105
  2,217
  2,335
  2,458
  2,587
  2,722
  2,863
  3,012
  3,167
  3,330
  3,501
  3,680
  3,868
  4,065
Working capital, $m
  185
  197
  210
  224
  238
  252
  268
  284
  300
  318
  336
  355
  374
  395
  417
  439
  463
  487
  513
  540
  569
  598
  629
  662
  696
  732
  770
  809
  850
  894
Total debt, $m
  389
  793
  1,214
  1,651
  2,106
  2,580
  3,074
  3,588
  4,124
  4,683
  5,266
  5,876
  6,512
  7,177
  7,872
  8,599
  9,359
  10,155
  10,988
  11,860
  12,773
  13,729
  14,732
  15,782
  16,883
  18,038
  19,248
  20,517
  21,848
  23,244
Total liabilities, $m
  5,948
  6,352
  6,772
  7,210
  7,665
  8,139
  8,632
  9,146
  9,682
  10,242
  10,825
  11,434
  12,071
  12,735
  13,430
  14,157
  14,918
  15,713
  16,546
  17,418
  18,331
  19,288
  20,290
  21,341
  22,442
  23,596
  24,807
  26,076
  27,407
  28,803
Total equity, $m
  2,525
  2,696
  2,875
  3,061
  3,254
  3,455
  3,664
  3,883
  4,110
  4,348
  4,595
  4,854
  5,124
  5,406
  5,701
  6,010
  6,333
  6,670
  7,024
  7,394
  7,782
  8,188
  8,613
  9,059
  9,527
  10,017
  10,530
  11,069
  11,634
  12,227
Total liabilities and equity, $m
  8,473
  9,048
  9,647
  10,271
  10,919
  11,594
  12,296
  13,029
  13,792
  14,590
  15,420
  16,288
  17,195
  18,141
  19,131
  20,167
  21,251
  22,383
  23,570
  24,812
  26,113
  27,476
  28,903
  30,400
  31,969
  33,613
  35,337
  37,145
  39,041
  41,030
Debt-to-equity ratio
  0.150
  0.290
  0.420
  0.540
  0.650
  0.750
  0.840
  0.920
  1.000
  1.080
  1.150
  1.210
  1.270
  1.330
  1.380
  1.430
  1.480
  1.520
  1.560
  1.600
  1.640
  1.680
  1.710
  1.740
  1.770
  1.800
  1.830
  1.850
  1.880
  1.900
Adjusted equity ratio
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  1,043
  1,103
  1,166
  1,231
  1,299
  1,370
  1,443
  1,520
  1,600
  1,683
  1,840
  1,931
  2,026
  2,125
  2,229
  2,338
  2,451
  2,570
  2,695
  2,825
  2,961
  3,104
  3,254
  3,411
  3,576
  3,748
  3,929
  4,119
  4,318
  4,526
Depreciation, amort., depletion, $m
  192
  199
  205
  212
  220
  228
  236
  244
  253
  262
  176
  185
  196
  207
  218
  230
  242
  255
  268
  283
  297
  313
  329
  346
  364
  383
  402
  423
  445
  467
Funds from operations, $m
  1,235
  1,302
  1,371
  1,443
  1,519
  1,597
  1,679
  1,764
  1,852
  1,945
  2,016
  2,117
  2,222
  2,332
  2,447
  2,567
  2,693
  2,825
  2,963
  3,107
  3,259
  3,417
  3,583
  3,757
  3,940
  4,131
  4,331
  4,542
  4,762
  4,993
Change in working capital, $m
  12
  13
  13
  14
  14
  15
  15
  16
  17
  17
  18
  19
  20
  21
  22
  23
  24
  25
  26
  27
  28
  30
  31
  33
  34
  36
  38
  39
  41
  43
Cash from operations, $m
  1,223
  1,289
  1,358
  1,430
  1,505
  1,582
  1,663
  1,748
  1,836
  1,928
  1,998
  2,098
  2,202
  2,311
  2,425
  2,545
  2,670
  2,800
  2,937
  3,080
  3,230
  3,387
  3,552
  3,725
  3,905
  4,095
  4,294
  4,502
  4,721
  4,950
Maintenance CAPEX, $m
  -90
  -96
  -103
  -110
  -117
  -124
  -132
  -140
  -148
  -157
  -166
  -176
  -185
  -196
  -207
  -218
  -230
  -242
  -255
  -268
  -283
  -297
  -313
  -329
  -346
  -364
  -383
  -402
  -423
  -445
New CAPEX, $m
  -56
  -57
  -59
  -62
  -64
  -67
  -70
  -73
  -76
  -79
  -82
  -86
  -90
  -94
  -98
  -103
  -107
  -112
  -118
  -123
  -129
  -135
  -141
  -148
  -155
  -163
  -171
  -179
  -188
  -197
Cash from investing activities, $m
  -146
  -153
  -162
  -172
  -181
  -191
  -202
  -213
  -224
  -236
  -248
  -262
  -275
  -290
  -305
  -321
  -337
  -354
  -373
  -391
  -412
  -432
  -454
  -477
  -501
  -527
  -554
  -581
  -611
  -642
Free cash flow, $m
  1,076
  1,136
  1,196
  1,258
  1,323
  1,391
  1,462
  1,535
  1,612
  1,692
  1,749
  1,836
  1,927
  2,022
  2,121
  2,224
  2,333
  2,446
  2,565
  2,689
  2,819
  2,955
  3,098
  3,247
  3,404
  3,568
  3,740
  3,921
  4,110
  4,309
Issuance/(repayment) of debt, $m
  389
  404
  421
  437
  455
  474
  493
  514
  536
  559
  583
  609
  636
  665
  695
  727
  760
  796
  833
  872
  913
  957
  1,002
  1,050
  1,101
  1,154
  1,210
  1,269
  1,331
  1,396
Issuance/(repurchase) of shares, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  389
  404
  421
  437
  455
  474
  493
  514
  536
  559
  583
  609
  636
  665
  695
  727
  760
  796
  833
  872
  913
  957
  1,002
  1,050
  1,101
  1,154
  1,210
  1,269
  1,331
  1,396
Total cash flow (excl. dividends), $m
  1,465
  1,540
  1,616
  1,696
  1,779
  1,865
  1,955
  2,049
  2,148
  2,251
  2,333
  2,445
  2,563
  2,687
  2,816
  2,951
  3,093
  3,242
  3,398
  3,561
  3,732
  3,912
  4,100
  4,298
  4,505
  4,722
  4,951
  5,190
  5,441
  5,705
Retained Cash Flow (-), $m
  -168
  -172
  -179
  -186
  -193
  -201
  -209
  -218
  -228
  -237
  -248
  -259
  -270
  -282
  -295
  -309
  -323
  -338
  -354
  -370
  -388
  -406
  -426
  -446
  -467
  -490
  -514
  -539
  -565
  -593
Prev. year cash balance distribution, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
  1,297
  1,368
  1,438
  1,510
  1,585
  1,664
  1,746
  1,831
  1,920
  2,013
  2,085
  2,187
  2,293
  2,404
  2,521
  2,643
  2,770
  2,904
  3,044
  3,191
  3,345
  3,506
  3,675
  3,852
  4,038
  4,232
  4,437
  4,651
  4,876
  5,112
Discount rate, %
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
  1,244
  1,253
  1,251
  1,243
  1,229
  1,208
  1,179
  1,145
  1,103
  1,056
  990
  933
  872
  807
  740
  672
  603
  535
  469
  405
  346
  291
  241
  196
  157
  123
  95
  72
  53
  38
Current shareholders' claim on cash, %
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Paychex, Inc. 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. The Company, through its HCM software-as-a-service platform, Paychex Flex, provides an integrated product suite that covers the employee life cycle from recruiting and hiring to retirement.

FINANCIAL RATIOS  of  Paychex, Inc. (PAYX)

Valuation Ratios
P/E Ratio 34.5
Price to Sales 8.9
Price to Book 14.4
Price to Tangible Book
Price to Cash Flow 29.4
Price to Free Cash Flow 32.6
Growth Rates
Sales Growth Rate 6.7%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -4.1%
Cap. Spend. - 3 Yr. Gr. Rate 2.3%
Financial Strength
Quick Ratio NaN
Current Ratio 0.9
LT Debt to Equity 0%
Total Debt to Equity 0%
Interest Coverage 0
Management Effectiveness
Return On Assets 12.3%
Ret/ On Assets - 3 Yr. Avg. 11.5%
Return On Total Capital 42.3%
Ret/ On T. Cap. - 3 Yr. Avg. 40.4%
Return On Equity 42.3%
Return On Equity - 3 Yr. Avg. 40.4%
Asset Turnover 0.5
Profitability Ratios
Gross Margin 0%
Gross Margin - 3 Yr. Avg. 23.5%
EBITDA Margin 43.5%
EBITDA Margin - 3 Yr. Avg. 43%
Operating Margin 39.3%
Oper. Margin - 3 Yr. Avg. 38.9%
Pre-Tax Margin 39.5%
Pre-Tax Margin - 3 Yr. Avg. 39.1%
Net Profit Margin 25.9%
Net Profit Margin - 3 Yr. Avg. 25.4%
Effective Tax Rate 34.4%
Eff/ Tax Rate - 3 Yr. Avg. 35%
Payout Ratio 81%

PAYX stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the PAYX stock intrinsic value calculation we used $3381 million for the last fiscal year's total revenue generated by Paychex, Inc.. The default revenue input number comes from 0001 income statement of Paychex, Inc.. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our PAYX stock valuation model: a) initial revenue growth rate of 7% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for PAYX is calculated based on our internal credit rating of Paychex, Inc., is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Paychex, Inc..
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of PAYX stock the variable cost ratio is equal to 60.7%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for PAYX stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 5.4% for Paychex, Inc..

Corporate tax rate of 27% is the nominal tax rate for Paychex, Inc.. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the PAYX stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for PAYX are equal to 23.2%.

Life of production assets of 8.7 years is the average useful life of capital assets used in Paychex, Inc. operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for PAYX is equal to 5.1%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $2356.8 million for Paychex, Inc. - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 359.081 million for Paychex, Inc. is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Paychex, Inc. at the current share price and the inputted number of shares is $28.2 billion.

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