Paychex, Inc. (NasdaqGS:PAYX) is expected to report earnings next Wednesday the 21st before the market opens. The company’s shares last traded at $60.63 as of today (15th), approximately 98% of its 52 week high and 106% of its 50 day moving average. fair value data implies that the stock is approximately 20% overvalued while Wall Street’s consensus price target of $55.00 implies 9% downside.

Comparable Company Analysis

Paychex’ EBITDA growth looks unattractive when compared to its publicly traded peer group: Fiserv, Inc. (NasdaqGS:FISV), Total System Services, Inc.(NYSE:TSS), Vantiv, Inc. (NYSE:VNTV) and The Western Union Company(NYSE:WU).

The company’s LTM EBITDA growth of 7.9% is above FISV (5.5%) and WU (-4.2%) but below TSS (14.7%) and VNTV (19.9%). When comparing Wall Street’s consensus forecast for each company, Paychex projected 5yr EBITDA CAGR of 7.0% is only above WU (1.0%) and below FISV (7.8%), TSS (14.3%) and VNTV (8.6%).

These growth figures don’t help explain why the company’s EBITDA multiples trade at a premium to its comparable company group. Typically, higher growth stocks will trade at higher multiples of EBITDA but this isn’t the case for Paychex. The company’s forward EBITDA multiple of 15.4x is above FISV (14.2x), TSS (11.6x) and WU (9.2x) and only below VNTV (16.2x).

Final Notes

Paychex appears fundamentally overvalued when inputting consensus Wall Street projections into various discounted cash flow (DCF) analyses and dividend discount models (DDM).

Value investors who are long the stock may want to take a closer look prior to earnings.



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