Paychex(PAYX) allows companies to outsource their payroll, human resources, insurance and benefits needs. This convenient service allows companies to focus on growing and managing the business. This type of convenience is very valuable, and has attributed to the growth of PAYX. We need to figure out whether PAYX adds value to an investor.
With a 3.5% dividend yield, PAYX seems like a company that can add value to an investors portfolio through price appreciation and dividend payouts. PAYX has no debt, which is a good sign for investors. The company can focus on growing, and hopefully increasing the dividend as it grows. A major portion of PAYX balance sheet is its funds held for clients, an asset, and its client fund obligations, a liability. These funds are collected from client accounts and paid on the clients behalf. PAYX collects interest on the funds before they are paid out. There is only a slight difference between the asset and liability, but it seems to make the company much larger than it really is, although its book value isn’t really affected.
PAYX has a current ratio of 2.71, which is pretty amazing. With $2.15 of free cash flow per share, and steadily rising, PAYX seems like a very solid company financially. The price is just a little steep. With a P/B ratio of 8.4 and a P/FCF ratio of 19, PAYX is a little overvalued. I would much rather use my money to invest in a company trading closer to book value and a price to free cash flow ratio of under 15.
Inputing the free cash flow per share into Guru Focus’ DCF model, we get a fair value of $22.01 and a margin of safety of -85%. Investors should avoid PAYX unless it declines significantly.