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 yearConsensus 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.

**Disclosure:**I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.