PAYX Stock Study

I recently did a stock study on Paychex Inc. (PAYX) with a closing price of $109.33.

M* writes:

     > Paychex is a leading provider of payroll, human capital management,
     > and insurance solutions servicing small and midsize clients primarily
     > in the United States. The company, established in 1979, services
     > over 730,000 clients and pays over 1 in 12 U.S. private-sector workers.
     > Alongside its traditional payroll services, Paychex offers HCM solutions
     > such as benefits administration and time and attendance software, as
     > well as human resources outsourcing and insurance agency services.

Over the past decade, this medium-size company has grown sales and EPS at annualized rates of 7.7% and 10.0%. Lines are mostly up, straight, and parallel except for the slightest of EPS dips in ’20 (by $0.01/share). PTPM far outpaces peer and industry averages while fighting off a 4-year decline to retake 2012 levels with a last-5-year mean of 37.0%.

Also over the past decade, ROE has been higher than peer and industry averages while increasing from 35.5% in ’12 to 42.1% in ’21 (FY ends May 31) with a last-5-year mean of 40.6%. Debt-to-Capital has been less than peer and industry averages despite increasing from 0% in ’12-’17 to 22.2% in ’21 with a last-5-year mean of 18.6%. Interest Coverage is 55.2 and Quick Ratio is 0.5. M* gives an Exemplary rating for Capital Allocation and Value Line gives an A rating for Financial Strength.

With regard to sales growth:

• CNN Business projects 6.0% YOY and 5.8% per year for ’23 and ’22-’24 (based on 17 analysts).
• YF projects YOY 8.4% and 6.2% for ’23 and ’24, respectively (19 analysts).
• Zacks projects YOY 6.4% and 6.5% for ’23 and ’24, respectively (6).
• Value Line projects 8.1% annualized growth from ’22-’27.
• CFRA projects 6.6% YOY and 6.4% per year for ’23 and ’22-’24, respectively.
• M* provides a 2-year ACE of 7.1%/year along with projecting 5-year annualized growth of 6.0% in its analyst note.

I am forecasting at the bottom of the range: 6.0%.

With regard to EPS growth:

• CNN Business projects 9.1% YOY and 8.0% per year for ’23 and ’22-’24, respectively (based on 17 analysts), along with 5-year annualized growth of 10.5%.
• MarketWatch projects 7.9% and 7.8% per year for ’23-’25 and ’23-’26, respectfully (21 analysts).
• Nasdaq.com projects 6.2% YOY for ’25 (4).
• Seeking Alpha projects 4-year annualized growth of 8.8%.
• YF projects YOY 13.5% and 7.2% for ’23 and ’24, respectively (20), along with 5-year annualized growth of 9.2%.
• Zacks projects YOY 8.4% and 7.1% for ’23 and ’24, respectively (7), along with 5-year annualized growth of 7.5%.
• Value Line projects 8.6% annualized growth from ’22-’27.
• CFRA projects 9.8% YOY and 7.6% for ’23 and ’22-’24, respectively, along with a 3-year CAGR of 7.0%.
• M* projects long-term growth of 9.0%.

I am forecasting just below the long-term-estimate range (mean of six: 8.9%) at 7.0%. I am using ’22 EPS of $3.94/share as the initial value rather than ’23 Q3 EPS of $4.15 (annualized).

My Forecast High P/E is 25.0. Over the past decade, high P/E has increased from 24.8 in ’12 to 37.0 in ’21 with a last-5-year mean of 31.9. The last-5-year-mean average P/E is 26.7. I am forecasting toward the bottom of the range (only ’12 is lower).

My Forecast Low P/E is 21.0. Over the past decade, low P/E has ranged from 15.7 in ’19 to 26.0 in ’21 with a last-5-year mean of 21.5. 15.7 in ’19 looks like it may be a downside outlier. Excluding that, the last-5-year mean is 22.9. Including that, the last-10-year median is 21.2. I am forecasting in the lower part of the range.

My Low Stock Price Forecast (LSPF) is the default value of $82.70 based on $3.94/share initial value. This is 24.4% less than the previous closing price, 20.6% less than the 52-week low, and 17.2% less than the 2021 low.

Over the past decade, Payout Ratio has ranged from 41.7% in ’12 to 83.2% in ’20 with a last-5-year mean of 79.4%. I am forecasting conservatively at 70.0% (only ’12 is lower).

These inputs land PAYX in the HOLD zone with a U/D ratio of 1.0. Total Annualized Return (TAR) is 7.1%.

PAR (using Forecast Average—not High—P/E) is 5.6%, which is less than I seek for a medium-size stock. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 252 studies over the past 90 days (74 outliers and my study excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 7.0%, 8.0%, 29.4, 21.1, and 79.4%, respectively. I am lower across the board. Value Line projects an average annual P/E of 26.0, which is higher than MS (25.3) and higher than mine (23.0).

MS high and low EPS are $5.95/share and $3.90/share vs. my $5.39 and $3.94. My high EPS is lower due to a lower forecast growth rate. MOS seems healthy in the current study.

MS LSPF of $82.60 implies a Forecast Low P/E of 21.2, which is consistent with the above-stated 21.1. This is 0.1% less than mine: almost identical. I think this is quite adequate since the stock is currently trading so close to the 52-week low.

PEG ratio and Relative Value [(current P/E) / 5-year-mean average P/E] are other valuation metrics I have recently begun to monitor. Zacks reports PEG of 3.2 (upper limit generally regarded to be 1.5). Relative Value (M* data) is 0.99.

Based on Kim Butcher’s “quick and dirty DCF” method, the stock should be valued at 21 * (6.65 – [4.64 + 0.55)] = $30.66 (i.e. stock overvalued by 257%). Something seems invalid here, but I’m new to this metric and need to see how it holds up over a larger sample size before drawing any conclusions.

I would look to re-evaluate this stock under $99/share. That is, once in the BUY zone I would update the numbers and invest if the projected return is acceptable.