+ Watch PAYX
on My Watchlist
Paychex provides payroll, human resource, and employee benefits outsourcing for small and medium-sized businesses.
One of my favorite wide-moat businesses trading at a lofty price. I expect Paychex to return 7% pa v a market return of 8% pa over the next 5 years. Over 50% of Paychex's expected ROI derives from its current dividend yield. I forecast that much of company's growth's contribution to ROI will be offset by a PE multiples that narrows to 18 from its current 21.5 over 5 years. Paychex's stock price appears to be 20% above its intrinsic value. This is a solid, well-managed business about which Mr. Market has become irrationally exuberant.
Of course, another way the PE could shrink would be if earnings grew at a higher rate. Earnings per share have been essentially flat for five years now while the number of jobs in the US has dropped by 2-3 million. I'd say flat earnings in this environment represents something of an accomplishment. One obvious way for PAYX to grow earnings would be for the number of jobs to rise. My bet is that will (eventually) happen.
I have updated my growth expectation based on recent economic information. PAYX could outperform the market, but I still believe the stock is trading at a small premium to its value. I would be a buyer below $25.60.
Update - Price/FV 1.08Fair value 38.3 Normalized eps 1.62Sales growth 11.9%Op Margin expands to 39.5% from 39.2%Competitive advantage period 10 years (wide moat)Discount rate 10%Market P/FV is 1.01PAYX to underperform marketInvestment period 5 yrs
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