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Paychex Inc: cash flow valuation

|Includes:Paychex, Inc. (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