Paychex Inc (PAYX, Financial), a prominent player in payroll and human capital management, has experienced a daily loss of -3.04% and a 3-month loss of -11.37%. Despite these losses, the company's Earnings Per Share (EPS) stands at 4.41. This raises the question: is the stock modestly undervalued? To answer this, we delve into a comprehensive valuation analysis of Paychex (PAYX).
Company Overview
Founded in 1979, Paychex is a leading provider of payroll, human capital management, and insurance solutions primarily servicing small and midsize clients in the United States. The company services over 740,000 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.
Comparing the stock price of Paychex (PAYX, Financial) with its GF Value, an estimation of the stock's fair value, provides a starting point for a deeper exploration of the company's value. This approach provides a comprehensive understanding of the company's financial position and intrinsic value.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock, derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
The stock of Paychex (PAYX, Financial) shows every sign of being modestly undervalued based on GuruFocus' valuation method. GF Value estimates the stock's fair value based on three key factors: historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the stock's share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. On the other hand, if the stock's share price is significantly below the GF Value Line, the stock may be undervalued and have high future returns. At its current price of $109.05 per share, Paychex has a market cap of $39.40 billion, indicating that the stock is modestly undervalued.
Because Paychex is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth.
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Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Paychex has a cash-to-debt ratio of 1.95, which ranks better than 60.08% of 1047 companies in the Business Services industry. Based on this, GuruFocus ranks Paychex's financial strength as 8 out of 10, suggesting a strong balance sheet.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is generally less risky. A company with high profit margins is usually a safer investment than those with low profit margins. Paychex has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $5.10 billion and Earnings Per Share (EPS) of $4.41. Its operating margin is 40.77%, which ranks better than 97.16% of 1056 companies in the Business Services industry. Overall, the profitability of Paychex is ranked 10 out of 10, which indicates strong profitability.
Growth is one of the most important factors in the valuation of a company. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Paychex is 7.3%, which ranks better than 58.44% of 972 companies in the Business Services industry. The 3-year average EBITDA growth is 10.2%, which ranks better than 51% of 847 companies in the Business Services industry.
ROIC vs WACC
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Paychex's return on invested capital is 17.97, and its cost of capital is 10.8.
Conclusion
Overall, Paychex (PAYX, Financial) stock shows every sign of being modestly undervalued. The company's financial condition is strong and its profitability is strong. Its growth ranks better than 51% of 847 companies in the Business Services industry. To learn more about Paychex stock, you can check out its 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
