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Eric Cota
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I'm a value investor for the long term primarily focused on firms in the S&P 500 that produce solid free cash flow and pay dividends. I look for undervalued firms using a discounted cash flow model. I reinvest dividends and track performance on a total return, risk-adjusted basis. Five years... More
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  • Paychex Inc: cash flow valuation 2 comments
    Apr 6, 2011 4:18 PM | about stocks: PAYX
    Current Price: ~ $32/share
    Projected Yield: ~ 3.85%

    Paychex competes in the payroll outsourcing industry. It is the second-largest player in terms of revenue and focuses on providing this service to small and medium-size business (50-100 employees). Paychex was created from the consolidation of 17 payroll processors in 1979 and services about 550,000 clients. The firm has 12,500 employees and is based in Rochester, N.Y.

    I estimated the firm's WACC today at 11.38% using the Capital Asset Pricing Model and the company's recent SEC filings.
     
    Recent free cash flows and noted growth rates:
    Year
    FCF $Millions
    2001
    260
    2002
    249
    2003
    313
    2004
    340
    2005
    397
    2006
    488
    2007
    552
    2008
    642
    2009
    624
    2010
    538
     
    Average Annual Growth FCF: approx. 9%
    CAGR FCF: approx. 8%
    Consensus Forecast Industry 5-Year Growth: approx. 17% per year
    Consensus Forecast Company 5-Year Growth: approx. 12% per year
     
    Scenario 1
    Assuming the company achieves a 5-year growth rate in FCF of 12% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:
     
    Discounted Cash Flow Valuation
    Year
    FCF $Millions
    0
    538
    1
    616
    2
    690
    3
    773
    4
    865
    5
    969
    Terminal Value
    9540
     
    The firm's future cash flows, discounted at a WACC of 11.38%, give a present value for the entire firm (Debt + Equity) of $8362 million.  The firm has no debt so the fair value of the firm's equity could be $8362 million.  $8362 million / 362 million outstanding shares is approximately $23 per share and a 20% margin of safety is $18/share.
     

    Scenario 2
    Assuming the company achieves a 5-year growth rate in FCF of 12% per year, and assuming that after the next five years, the company achieves growth in FCF of 3% per year forever:
     
    Discounted Cash Flow Valuation
    Year
    FCF $Millions
    0
    538
    1
    616
    2
    690
    3
    773
    4
    865
    5
    969
    Terminal Value
    12955
     
    The firm's future cash flows, discounted at a WACC of 11.38%, give a present value for the entire firm (Debt + Equity) of $10,354 million. The firm has no debt so the fair value of the firm's equity could be $10,354 million.  $10,354 million / 362 million outstanding shares is approximately $29 per share and a 20% margin of safety is $23/share.
     
     
    Sources
    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Stocks: PAYX
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Comments (2)
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  • PSU Investor
    , contributor
    Comments (61) | Send Message
     
    Like your work!
    24 Jun 2011, 01:36 PM Reply Like
  • Eric Cota
    , contributor
    Comments (22) | Send Message
     
    Author’s reply » Thanks Christian - I'm gonna try to step up the pace with more frequent posts. Best of luck in to you as you pursue the CFA and MBA.
    24 Jun 2011, 04:23 PM Reply Like
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