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Paychex Inc: Cash Flow Valuation Update

|Includes: Paychex, Inc. (PAYX)

Current Price: ~ $33/share
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.

Estimated WACC for the firm today is 10.11% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year FCF $Millions
2003 313
2004 340
2005 397
2006 488
2007 552
2008 642
2009 624
2010 538
2011 615
2012 617

Average Annual Growth FCF: ~ 8%

CAGR FCF: ~ 8%
Consensus Forecast Industry 5-Year Growth: ~ 15% per year

Consensus Forecast Company 5-Year Growth: ~ 10% per year

Internal Growth Rate: ~ 1.5%

Sustainable Growth Rate: ~ 6%

Scenario 1
Average FCF (2012, 2011, 2010) is $590 million

  • Start at $590 million FCF
  • Assume a 5-year growth rate in FCF of 10% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 590
1 649
2 714
3 785
4 864
5 950
Terminal Value 10338

The firm's future free cash flows, discounted at a WACC of 10.11%, give a present value for the entire firm (Debt + Equity) of $9329 million. The firm has no debt and $9329 million / 363 million outstanding shares is approximately $26 per share. A 20% margin of safety is $21/share.

Scenario 2
All else being equal,

  • Assume a 5-year growth rate in FCF of 8% per year, then 4% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 590
1 637
2 688
3 743
4 803
5 867
Terminal Value 15323
  • Present Value of the entire firm (Debt + Equity): $12252 million
  • Value of Equity: $12252 million or $34/share
  • 20% margin of safety is $27/share

Sources

Morningstar.com

Yahoo! Finance

Paychex.com

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