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:
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:
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
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.
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 |
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.
