Student Investment Fund Stock Report     Analysts: Carolyn VanderStaay & Juan Hernandez-Martinez 

 Page  1 

Paychex, Inc. NASDAQ:PAYX

                         

 

     

                                                                                                   

 

 

 

 

 

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20

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80

PAYX ADP ASF Industry

Gross Margin

Operating Margin

Profit Margin

Metrics Paychex, Inc  ADP, Inc.5-year ROIC 115% 65%WACC 9% 9%5-year Revenue Growth 11.8% 4.8%Gross Margin 65.8% 55.4%Operating Margin 42.8% 20.6%Profit Margin 29.8% 13.2%Long Term Debt -0- $52MPretax ROE 59.2% 38.0%5-year average ROE 30.2% 19.1% Pretax ROA 15.9% 7.5% Return on Capital (ROC) 39.4% 23.1% Reinvestment Rate 9.3% 11.8% ROE Relative to S&P 500 2.22 1.40

Key Statistics

Recommendation: Buy Market Cap: $9.27 Bil

Recent Price: $28.26 (11/28/08) Target Price: $49.60

Primary Sector: Payroll Services Secondary Sector: Data Processing Services

Highlights • Low capital requirements consistently

drive the ROIC in the range of 105%-120%; FY08 ROIC is 115%

• Inherent scalability of operations delivers higher margins relative to the industry

• FY08 is the 18th consecutive year of record total revenue, net income, and diluted EPS

• Two-thirds of new clients come from referral sources such as CPAs, banks and current clients

• Client retention was 80% in FY08

Business Summary Paychex, Inc. is a leading provider of comprehensive payroll and integrated human resource and employee benefits outsourcing solutions for small- to medium-sized businesses in the U.S. Their services include payroll processing, payroll tax administration services, employee payment services, and other payroll-related services, including regulatory compliance. Paychex's Human Resource Services includes its Professional Employer Organization, retirement services administration, workers' compensation insurance services, health and benefits services, time and attendance solutions and other products and services. As of May 31, 2008, they serviced approximately 572,000 clients and had approximately 12,200 employees. Paychex maintains their corporate headquarters in Rochester, New York, and has more than 100 offices nationwide. They also serviced approximately 1,200 clients in Germany through four offices.

Profitability vs. the Industry

PAYX

Industry

S&P 500

Price Performance

Student Investment Fund Stock Report: PAYX 

 Carolyn VanderStaay & Juan Hernandez-Martinez       Page 2 

Company Overview Paychex has built around it a protective barrier to economic downturns that is driven by

• High customer switching costs allows Paychex to build a relatively sticky client base • Low capital requirements drive a high return on capital and • Inherent scalability allows Paychex to add new customers without incurring direct marginal costs • 66% of new clients come from referrals such as CPAs, banks and current clients • FY08 was the 18th consecutive year of record Revenue, Net Income and EPS

Products and Services Payroll processing is the foundation of the Paychex service portfolio and drives 75% of its revenue. Payroll processing ancillary services include payroll tax administration services, employee payment services, and other payroll-related services, including regulatory compliance. Paychex's Human Resource Services includes its Professional Employer Organization (PEO), retirement services administration, workers' compensation insurance services, health and benefits services, time and attendance solutions and other products and services. Paychex also earns interest on funds held for clients between the time of collection from our clients and remittance to the applicable tax or regulatory agency. Interest Income historically accounts for 6% of total revenue.

Clients In FY08, client retention was approximately 80% of their beginning of the year client base, as switching costs are high for small-to-medium sized businesses. The most significant factors affecting client retention are companies going out of business or no longer having any employees. Paychex's client base is not industry specific and it clients operate in a broad range of industries. No single client has a material impact on total service revenue.

Company Strategy Paychex capitalizes on growth opportunities within their current client base and from new clients by increasing utilization of their ancillary services and products including payroll tax administration services and employee payment services. The portfolio of ancillary services provides Paychex with additional recurring revenue streams and increased service efficiencies as Paychex has integrated these services and products with the core payroll processing services and can leverage the information gathered in the base payroll processing system.

Ancillary Service Utilization rate FY08 Revenue GrowthPayroll tax administration services 93% 8%Employee payment services 73% 19%

Paychex leverages its highly developed technological and operating infrastructure and proprietary software. Paychex is also able to supplement growth through strategic acquisitions or expansion of service offerings.

Industry Outlook Although Paychex, Inc. classifies itself as both a firm in the Accounting, Tax, Bookkeeping & Payroll Services sector, and as a firm in the Data Processing Services segment in the US, therefore we need to consider the outlook of both sectors to understand Paychex's potential outlook. Both of these sectors are dependent on overall trends in Outsourcing in the U.S. Analysts expect the outsourcing of data processing needs to accelerate over the 5-year outlook horizon. Analysts also report that HR functions are among the most common business functions outsourced.

Sector Life Cycle 2009 2010 2011 2012 2013Accounting, Tax, Bookkeeping & Payroll Services

Growth 2.0% 3.4% 3.2% 3.1% 3.1%

IT Support, CRM & Data Processing Services

Mature High Growth

2.9% 10.1% 9.8% 9.2% 11.2%

Student Investment Fund Stock Report: PAYX 

 Carolyn VanderStaay & Juan Hernandez-Martinez       Page 3 

Market Opportunities There are approximately 9.4 million employers in the geographic markets that Paychex currently serves within the U.S and of those employers, over 99% have fewer than 100 employees and are the primary customers and target market. Based on publicly available industry data, analysts estimate that all payroll processors combined serve approximately 15% of the potential businesses in the target market. The un-penetrated market is composed of businesses with 10 or fewer employees. Paychex, Inc. market segmentation shows that 80% of their business comes from companies with 20 and fewer employees.

Approximately two-thirds of new clients (excluding acquisitions) come from referrals from strong relationships with existing clients, CPAs and banks. Paychex formed a partnership with American Institute of Certified Public Accountants and is now the preferred payroll provider for its AICPA Business Solutions Partner Program.

Competitive Analysis Paychex, Inc.’s closest national competitor is ADP (Automatic Data Processing, Inc.), the largest third-party provider of payroll processing and human resource services in terms of revenue. Paychex and ADP combined serve 40% of this market. Paychex has left the servicing of larger firms to ADP and, at least for the current time, these firms have stayed out of each other’s markets, avoiding the intense competitive behavior that saps margins and profits. Paychex has a greater ability than ADP to drive dollars out of its operations, as both its Operating Margin and its Profit Margin is more than twice that of ADP.

Metric PAYX ADP Gross Margin 65.8% 55.4% Operating Margin 42.8% 20.6% Profit Margin 29.8% 13.2% Long Term Debt -0- $52M

Excellence and discipline in operations drives returns for Paychex that are higher than its industry competitors are.

Profitability Metrics Paychex, Inc ADP, Inc. Administaff, Inc.Pretax ROE 59.2% 38.0% 36.6%5-year average ROE 30.2% 19.1% 18.4%Pretax ROA 15.9% 7.5% 13.5%Return on Capital (ROC) 39.4% 23.1% 23.5%Reinvestment Rate 9.3% 11.8% 17.8%ROE Relative to S&P 500 2.22 1.40 1.62

For Paychex, the ROIC, WACC and Revenue Growth metrics, all components required for creation of value, are also significantly higher than its competitor's metrics.

Metric PAYX ADP 5-year Average ROIC 103% 65% WACC 9% 9% 5-year Average Revenue Growth 11.8% 4.8%

1‐4 employees

77%

5‐19 employees

18%

20‐49 employees

4%

50+ employees

1%

Target Market

1‐4 employees

39%

5‐19 employees

42%

20‐49 employees

13%

50+ employees

6%

Paychex Client Base

Student Investment Fund Stock Report: PAYX 

 Carolyn VanderStaay & Juan Hernandez-Martinez       Page 4 

Valuation Discounted Cash Flow Valuation Model and Forecast Using a customized DCF model, our estimated per share intrinsic value of Paychex is $49.60, compared with the recent closing stock price of $28.26. Paychex has a stable and consistent operational footprint; therefore, the DCF model assumptions listed below were straightforward to extract from 5-year historical averages.

DCF Model Parameter Historical Value

Cost of Sales 35% SG&A 30% Tax Rate 32% Cash 10% Receivables 13% Good Will 25% ST Investments 236%

The team modified the following model assumptions to reflect current and future business conditions. DCF Model Parameter

Historical Value

Model Value Justification

Revenue Growth 12% FY09 5% Horizon 7%-5%

To reflect a conservative approach to valuation

Dividends payout as % of NI

55% 77% Paychex dramatically increased their payout ratio in FY08 continued the trend in Q1 FY09

Interest Income 6% 2% To reflect volatile interest rates

Net PPE 14.5% 16% To reflect investments in infrastructure over time

Long Term Investment

18% 4% To reflect the current trend in allocation of assets

Results of Model Forecast Because Paychex has high ROIC, wide ROIC over the WACC spread, and expected revenue growth from market opportunities, the model forecasted that Paychex will continue current trends of EVA, MVA, NOPAT, FCF, EPS, DPS as the graphs below demonstrate.

Estimated Per Share Intrinsic Value

Market Close

$49.60 $28.26

Student Investment Fund Stock Report: PAYX 

 Carolyn VanderStaay & Juan Hernandez-Martinez       Page 5 

Market Risks Paychex faces the following risks to its strategic plans:

• The current recession, which has the potential to be long and severe, could hurt Paychex's ability to meet target growth rates • Interest income from temporary funds are unreliable given the current interest rate environment • The firm’s Professional Employer Organization service line is exposed to a greater amount of regulatory risk.

Recommendation-Buy Paychex has built around it a protective barrier to economic downturns that is driven by:

• High customer switching costs allows Paychex to build a relatively sticky client base • Low capital requirements drive a high return on capital and • Inherent scalability allows Paychex to add new customers without incurring direct marginal costs

Additionally: • Paychex has no debt • FY08 was the 18th consecutive year of record Revenue, Net Income and EPS • Paychex is a dividend-paying stock with expected yields starting at above 4.5% • Paychex has demonstrated, through its financial results, consistent long-term discipline and excellence in execution

PAYX.xlsm Valuation and Analysis Model, Page 1 of 8

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A B C D E F G H I J K L M N

Enter Firm Ticker PAYX

Enter first financial statement year in cell B6 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 Average ManualTotal revenue 1,240 1,385 1,574 1,753 1,935 Revenue Growth 11.7% 13.7% 11.4% 10.4% 11.8% 8.5%

Cost of goods sold 463 499 560 615 661 COGS % of Sales 37.4% 36.0% 35.6% 35.1% 34.2% 35.7% 35.0%Gross profit 777 886 1,014 1,137 1,274

SG&A expense 398 412 465 570 577 SG&A % of Sales 32.1% 29.8% 29.5% 32.5% 29.8% 30.7% 30.0%Research & Development 0 0 0 0 0 R&D % of Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Depreciation/Amortization 0 0 0 0 0 D&A % of Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Interest expense (income), operating (54) (60) (100) (134) (132) Inc. Exp. Oper. -4.4% -4.4% -6.4% -7.7% -6.8% -5.9% -6.0%Non-recurring expenses 0 0 0 0 0 Exp. Non-rec 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Other operating expenses 0 0 0 0 0 Other exp. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Operating Income 433 534 649 702 828Interest income (expense), non-operating 16 12 25 42 27 Int. inc. non-oper. 1.3% 0.9% 1.6% 2.4% 1.4% 1.5%Gain (loss) on sale of assets 0 0 0 0 0 Gain (loss) asset sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Other income, net 0 0 0 0 0 Other income, net 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Income before tax 450 546 674 743 855Income tax 147 177 210 228 279 Tax rate 32.6% 32.5% 31.1% 30.7% 32.6% 31.9% 32.0%

Income after tax 303 369 464 515 576Minority interest 0 0 0 0 0 Minority interest 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Equity in affiliates 0 0 0 0 0 Equity in affiliates 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%U.S. GAAP adjustment 0 0 0 0 0 U.S. GAAP adjust. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Net income before extraordinary items 303 369 464 515 576Extraordinary items, total 0 0 0 0 0 Extrordinary items

Net income 303 369 464 515 576 Net Income 26.6% 29.5% 29.4% 29.8% 17.4%Total adjustments to net income 0 0 0 0 0 Adjustments to NIBasic weighted average shares 377 378 379 381 368 Share growth 0.3% 0.3% 0.4% -3.3% -0.6% 0.0%Basic EPS excluding extraordinary items 0.80 0.97 1.22 1.35 1.56 18.1%Basic EPS including extraordinary items 0.80 0.97 1.22 1.35 1.56 18.1%Diluted weighted average shares 380 380 381 383 370 Diluted share growth 0.1% 0.4% 0.4% -3.5% -0.7% 0.0%Diluted EPS excluding extraordinary items 0.80 0.97 1.22 1.35 1.56 18.2%Diluted EPS including extraordinary items 0.80 0.97 1.22 1.35 1.56 18.2%Dividends per share -- common stock 0.47 0.51 0.61 0.79 1.20 26.4%Gross dividends -- common stock 177 193 232 301 442 Dividend % of Net Income 58.6% 52.3% 49.9% 58.5% 76.7% 59.2% 77.0%Retained earnings 126 176 233 214 134

values in millions

0

0

Forecasting PercentagesHistorical Income Statements

Forecasted income statement items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.

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O P Q R S T U V W X Y Z

Year-by-year revenue growth 5.00% 7.00% 7.00% 6.00% 6.00% 5.00% 5.00% 5.00% 5.00% 5.00%

year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018Total revenue 2,031 2,173 2,326 2,465 2,613 2,744 2,881 3,025 3,176 3,335

Cost of goods sold 711 761 814 863 915 960 1,008 1,059 1,112 1,167Gross profit 1,320 1,413 1,512 1,602 1,698 1,783 1,873 1,966 2,065 2,168

SG&A expense 609 652 698 740 784 823 864 907 953 1,000Research & Development 0 0 0 0 0 0 0 0 0 0Depreciation/Amortization 0 0 0 0 0 0 0 0 0 0Interest expense (income), operating (122) (130) (140) (148) (157) (165) (173) (181) (191) (200)Non-recurring expenses 0 0 0 0 0 0 0 0 0 0Other operating expenses 0 0 0 0 0 0 0 0 0 0

Operating Income 833 891 953 1,011 1,071 1,125 1,181 1,240 1,302 1,367Interest income (expense), non-operating 0 0 0 0 0 0 0 0 0 0Gain (loss) on sale of assets 0 0 0 0 0 0 0 0 0 0Other income, net 0 0 0 0 0 0 0 0 0 0

Income before tax 833 891 953 1,011 1,071 1,125 1,181 1,240 1,302 1,367Income tax 267 285 305 323 343 360 378 397 417 438

Income after tax 566 606 648 687 729 765 803 843 886 930Minority interest 0 0 0 0 0 0 0 0 0 0Equity in affiliates 0 0 0 0 0 0 0 0 0 0U.S. GAAP adjustment 0 0 0 0 0 0 0 0 0 0

Net income before extraordinary items 566 606 648 687 729 765 803 843 886 930Extraordinary items, total 0 0 0 0 0 0 0 0 0 0

Net income 566 606 648 687 729 765 803 843 886 930Total adjustments to net income 0 0 0 0 0 0 0 0 0 0Basic weighted average shares 368 368 368 368 368 368 368 368 368 368Basic EPS excluding extraordinary items 1.54 1.64 1.76 1.87 1.98 2.08 2.18 2.29 2.40 2.52Basic EPS including extraordinary items 1.54 1.64 1.76 1.87 1.98 2.08 2.18 2.29 2.40 2.52Diluted weighted average shares 370 370 370 370 370 370 370 370 370 370Diluted EPS excluding extraordinary items 1.53 1.64 1.75 1.86 1.97 2.07 2.17 2.28 2.40 2.52Diluted EPS including extraordinary items 1.53 1.64 1.75 1.86 1.97 2.07 2.17 2.28 2.40 2.52Dividends per share -- common stock 1.18 1.27 1.36 1.44 1.52 1.60 1.68 1.76 1.85 1.94Gross dividends -- common stock 436 467 499 529 561 589 618 649 682 716Retained earnings 130 139 149 158 168 176 185 194 204 214

Forecasted Income Statements -- 10 Years

Revenues grow at the same rate each year unless a growth value is manually entered in the cell above the forecast year, in which case the year-by-year value overrides the historical or manual average. It makes sense to start tapering the growth forecasts 5 or 6 years into the forecast period.

PAYX.xlsm Valuation and Analysis Model, Page 3 of 8

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AA AB AC AD AE AF AG AH AI AJ AK AL AM AN

Enter Firm Ticker PAYX

Year 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 Average ManualAssets

Cash & equivalents 219 78 137 79 164 Cash % of Sales 17.7% 5.6% 8.7% 4.5% 8.5% 9.0% 10.0%Short term investments 2,858 3,205 4,032 4,485 4,037 ST Invest. % of Sales 230.5% 231.5% 256.2% 255.9% 208.7% 236.5%Receivables, total 158 193 228 240 219 Receivables % Sales 12.8% 13.9% 14.5% 13.7% 11.3% 13.2% 13.0%Inventory, total 0 0 0 0 0 Inventory % of Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Prepaid expenses 19 26 29 33 38 Pre. Exp. % of Sales 1.5% 1.9% 1.8% 1.9% 2.0% 1.8% 2.0%Other current assets, total 26 20 18 24 7 Other CA % of Sales 2.1% 1.4% 1.2% 1.4% 0.4% 1.3% 2.0%

Total Current Assets 3,280 3,522 4,444 4,861 4,466Property, plant and equipment (net) 171 205 235 256 275 Net PPE % of Sales 13.8% 14.8% 14.9% 14.6% 14.2% 14.5% 15.0%Goodwill 406 406 406 408 433 Goodwill % of Sales 32.7% 29.3% 25.8% 23.3% 22.4% 26.7% 25.0%Intangibles 85 71 61 67 75 Intangibles % of Sales 6.8% 5.2% 3.9% 3.8% 3.9% 4.7% 4.0%Long term investments 0 404 384 633 42 LT Invest. % of Sales 0.0% 29.2% 24.4% 36.1% 2.2% 18.4% 4.0%Notes receivable -- long term 0 0 0 0 0 Notes Rec. % of Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Other long term assets, total 8 8 19 21 19 Other LT ass. % Sales 0.7% 0.6% 1.2% 1.2% 1.0% 0.9% 1.0%Other assets, total 0 0 0 0 0 Other assets % Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Total assets 3,950 4,617 5,549 6,247 5,310Liabilities and Shareholders' Equity

Accounts payable 23 30 47 47 40 Acc. Payable % Sales 1.8% 2.2% 3.0% 2.7% 2.1% 2.3% 2.0%Payable/accrued 0 0 0 0 0 Pay/accured % Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Accrued expenses 105 107 130 125 133 Acc. Exp. % of Sales 8.5% 7.7% 8.3% 7.1% 6.9% 7.7% 7.5%Notes payable/short term debt 0 0 0 0 0 Notes payable % Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Current portion of LT debt/Capital leases 0 0 0 0 0 Curr. debt % of Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Other current liabilities 2,594 3,043 3,662 4,065 3,864 Other curr liab % Sales 209.2% 219.8% 232.7% 231.9% 199.8% 218.7% 200.0%

Total Current Liabilities 2,722 3,180 3,838 4,237 4,037 219.5% 229.7% 243.9% 241.7% 208.7% 228.7%Long term debt, total 0 0 0 0 0 LT debt % of Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Deferred income tax 14 18 15 10 10 Def. inc. tax % Sales 1.2% 1.3% 1.0% 0.5% 0.5% 0.9% 1.0%Minority interest 0 0 0 0 0 Min. Int. % of Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Other liabilities, total 14 34 41 47 66 Other liab. % of Sales 1.1% 2.4% 2.6% 2.7% 3.4% 2.5%

Total Liabilities 2,750 3,232 3,894 4,294 4,113Preferred stock (redeemable) 0 0 0 0 0Preferred stock (unredeemable) 0 0 0 0 0Common stock 4 4 4 4 4Additonal paid-in capital 227 241 284 363 432 18.3% 17.4% 18.1% 20.7% 22.3% 19.4% 20.0%Retained earnings (accumluated deficit) 972 1,148 1,381 1,595 745 Retained Earnings 18.1% 20.3% 15.5% -53.3% -6.4%Treasury stock -- common 0 0 0 0 0ESOP Debt Guarantee 0 0 0 0 0Other equity, total (unrealized gain) (3) (6) (14) (10) 16

Total Shareholders' Equity 1,200 1,386 1,655 1,952 1,197Total Liabilities and Shareholders' Equity 3,950 4,617 5,549 6,247 5,310Diluted weighted average shares 380 380 381 383 370 Diluted share growth 0.1% 0.4% 0.4% -3.5% -0.7% 0.0%Total preferred shares outstanding 0 0 0 0 0 Preferred share growth

values in millionsHistorical Balance Sheets Forecasting Percentages

Forecasted balance sheet items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.

The model uses the more conservative diluted common shares number for total shares outstanding.

PAYX.xlsm Valuation and Analysis Model, Page 4 of 8

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AO AP AQ AR AS AT AU AV AW AX AY AZ

ST Investments as a % of Sales 207% 213% 220% 228% 236% 245% 256% 267% 278% 292%

Cash & equivalents

Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018Assets

Cash & equivalents 203 217 233 247 261 274 288 302 318 333Short term investments 4,195 4,633 5,115 5,613 6,162 6,732 7,362 8,063 8,845 9,722Receivables, total 264 283 302 320 340 357 375 393 413 434Inventory, total 0 0 0 0 0 0 0 0 0 0Prepaid expenses 41 43 47 49 52 55 58 60 64 67Other current assets, total 41 43 47 49 52 55 58 60 64 67

Total Current Assets 4,744 5,220 5,743 6,279 6,868 7,473 8,140 8,879 9,702 10,622Property, plant and equipment (net) 305 326 349 370 392 412 432 454 476 500Goodwill 508 543 581 616 653 686 720 756 794 834Intangibles 81 87 93 99 105 110 115 121 127 133Long term investments 81 87 93 99 105 110 115 121 127 133Notes receivable -- long term 0 0 0 0 0 0 0 0 0 0Other long term assets, total 20 22 23 25 26 27 29 30 32 33Other assets, total 0 0 0 0 0 0 0 0 0 0

Total assets 5,739 6,285 6,882 7,486 8,148 8,817 9,552 10,362 11,259 12,256Liabilities and Shareholders' Equity

Accounts payable 41 43 47 49 52 55 58 60 64 67Payable/accrued 0 0 0 0 0 0 0 0 0 0Accrued expenses 152 163 174 185 196 206 216 227 238 250Notes payable/short term debt 0 0 0 0 0 0 0 0 0 0Current portion of LT debt/Capital leases 0 0 0 0 0 0 0 0 0 0Other current liabilities 4,063 4,347 4,651 4,930 5,226 5,487 5,762 6,050 6,352 6,670

Total Current Liabilities 4,256 4,553 4,872 5,164 5,474 5,748 6,035 6,337 6,654 6,987Long term debt, total 0 0 0 0 0 0 0 0 0 0Deferred income tax 20 22 23 25 26 27 29 30 32 33Minority interest 0 0 0 0 0 0 0 0 0 0Other liabilities, total 50 53 57 60 64 67 71 74 78 82

Total Liabilities 4,326 4,628 4,952 5,250 5,565 5,843 6,135 6,442 6,764 7,102Preferred stock (redeemable) 0 0 0 0 0 0 0 0 0 0Preferred stock (unredeemable) 0 0 0 0 0 0 0 0 0 0Common stock 4 4 4 4 4 4 4 4 4 4Additonal paid-in capital 518 622 746 895 1,074 1,289 1,547 1,856 2,227 2,673Retained earnings (accumluated deficit) 876 1,015 1,164 1,322 1,490 1,666 1,850 2,044 2,248 2,462Treasury stock -- common 0 0 0 0 0 0 0 0 0 0ESOP Debt Guarantee 0 0 0 0 0 0 0 0 0 0Other equity, total 16 16 16 16 16 16 16 16 16 16

Total Shareholders' Equity 1,413 1,656 1,930 2,237 2,583 2,974 3,417 3,920 4,495 5,154Total Liabilities and Shareholders' Equity 5,739 6,285 6,882 7,486 8,148 8,817 9,552 10,362 11,259 12,256Total common shares (diluted) 370 370 370 370 370 370 370 370 370 370Total preferred shares outstanding 0 0 0 0 0 0 0 0 0 0AFN (interactive with 3 items below) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Adjustment to LT Debt (iterate or use Goal Seek)Issue Common Stock to Fund AFNSet Balance Sheet Cash (or ST Investment) Lower to Fund AFNSet Balance Sheet ST Investments Lower to Fund AFN 4,195.1 4,632.8 5,114.6 5,613.0 6,162.1 6,731.8 7,362.2 8,062.8 8,844.8 9,721.5

Forecasted Balance Sheets -- 10 Years

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BA BB BC BD BE BF BG BH BI BJ BK BL BM BN BO BPEnter Firm Ticker PAYX

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018Liquidity

Current 1.21 1.11 1.16 1.15 1.11 1.11 1.15 1.18 1.22 1.25 1.30 1.35 1.40 1.46 1.52Quick 1.21 1.11 1.16 1.15 1.11 1.11 1.15 1.18 1.22 1.25 1.30 1.35 1.40 1.46 1.52Net Working Capital to Total Assets 0.14 0.07 0.11 0.10 0.08 0.09 0.11 0.13 0.15 0.17 0.20 0.22 0.25 0.27 0.30

Asset ManagementDays Sales Outstanding 46.60 50.86 52.87 49.95 41.34 47.45 47.45 47.45 47.45 47.45 47.45 47.45 47.45 47.45 47.45Inventory Turnover N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/AFixed Assets Turnover 7.24 6.74 6.71 6.85 7.03 6.67 6.67 6.67 6.67 6.67 6.67 6.67 6.67 6.67 6.67Total Assets Turnover 0.31 0.30 0.28 0.28 0.36 0.35 0.35 0.34 0.33 0.32 0.31 0.30 0.29 0.28 0.27

Debt ManagementLong-Term Debt to Equity 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Total Debt to Total Assets 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Times Interest Earned N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

ProfitabilityGross Profit Margin 62.6% 64.0% 64.4% 64.9% 65.8% 65.0% 65.0% 65.0% 65.0% 65.0% 65.0% 65.0% 65.0% 65.0% 65.0%Operating Profit Margin 34.9% 38.5% 41.2% 40.0% 42.8% 41.0% 41.0% 41.0% 41.0% 41.0% 41.0% 41.0% 41.0% 41.0% 41.0%Net After-Tax Profit Margin 24.4% 26.6% 29.5% 29.4% 29.8% 27.9% 27.9% 27.9% 27.9% 27.9% 27.9% 27.9% 27.9% 27.9% 27.9%Total Assets Turnover 0.31 0.30 0.28 0.28 0.36 0.35 0.35 0.34 0.33 0.32 0.31 0.30 0.29 0.28 0.27Return on Assets 7.7% 8.0% 8.4% 8.3% 10.9% 9.9% 9.6% 9.4% 9.2% 8.9% 8.7% 8.4% 8.1% 7.9% 7.6%Equity Multiplier 3.29 3.33 3.35 3.20 4.44 4.06 3.79 3.57 3.35 3.15 2.96 2.80 2.64 2.50 2.38Return on Equity 25.2% 26.6% 28.0% 26.4% 48.1% 40.1% 36.6% 33.6% 30.7% 28.2% 25.7% 23.5% 21.5% 19.7% 18.0%

EPS (using diluted shares, excluding extraordinary items 0.80 0.97 1.22 1.35 1.56 1.53 1.64 1.75 1.86 1.97 2.07 2.17 2.28 2.40 2.52DPS (dividends per share) 0.47 0.51 0.61 0.79 1.20 1.18 1.26 1.35 1.43 1.52 1.59 1.67 1.76 1.85 1.94

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018NOPAT (net operating profit after tax) 292 360 447 487 558 567 607 649 688 730 766 804 845 887 931ROIC (return on invested capital) 69.3% 106.4% 105.5% 120.7% 114.9% 98.0% 98.0% 98.0% 98.0% 98.0% 98.0% 98.0% 98.0% 98.0% 98.0%EVA (economic value added) 254 330 409 450 515 515 551 590 625 663 696 730 767 805 846FCF (free cash flow) 443 362 507 476 474 566 606 649 687 729 765 804 844 886Weighted Average Cost of Capital 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00%Net Operating Working Capital (NOWC) 250 134 189 147 211 274 293 314 333 353 370 389 408 429 450Operating Long Term Assets 171 205 235 256 275 305 326 349 370 392 412 432 454 476 500Total Operating Capital 421 339 423 403 486 579 619 663 703 745 782 821 862 905 950

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018Long-term Horizon Value Growth Rate (user-supplied) 5.00%PV of Forecasted FCF, discounted at 9.00% $14,128 $14,925 $15,702 $16,510 $17,347 $18,221 $19,132 $20,088 $21,093 $22,147 $24,068Value of Non-Operating Assets $4,201 $4,398 $4,850 $5,347 $5,859 $6,423 $7,006 $7,650 $8,365 $9,162 $10,055Total Intrinsic Value of the Firm $18,329 $19,324 $20,553 $21,857 $23,206 $24,644 $26,138 $27,739 $29,458 $31,310 $34,123Intrinsic Market Value of the Equity $18,329 $19,324 $20,553 $21,857 $23,206 $24,644 $26,138 $27,739 $29,458 $31,310 $34,123Per Share Intrinsic Value of the Firm $49.60 $52.29 $55.62 $59.15 $62.80 $66.69 $70.73 $75.06 $79.72 $84.73 $92.34MVA (market value added) $17,132 $17,910 $18,896 $19,927 $20,970 $22,061 $23,164 $24,322 $25,538 $26,815 $28,968

Item Value Percent Cost Weighted Cost Risk Free Rate 4.50%ST Debt (from most recent balance sheet) 0 0.00% 6.70% 0.00% Beta 0.90LT Debt (from most recent balance sheet) 0 0.00% 8.50% 0.00% Market Risk Prem. 5.00%MV Equity (look up stock's mkt. cap and enter in cell BB53 9,710 100.00% 9.00% 9.00% Cost of Equity 9.00%Weighted Average Cost of Capital 9.00%

values in millionsHistorical Ratios and Valuation Model

Valuation (in millions where appropriate) -- through year 2018

Weighted Average Cost of Capital Calculations Capital Asset Pricing Model

Forecasted Ratios and Valuation Model -- 10 Years

Valuation Metrics Trend Analysis (NOPAT, EVA, MVA, FCF and Capital in millions) Forecasted Valuation Metrics -- 10 Years

PAYX.xlsm Valuation and Analysis Model, Page 6 of 8

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BQ BR BS BT BU BV BW BX BY BZ CA CB CC CD CE CF CG CH

Inputs 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018EPer share value (hist. & DCF est.) $37.51 $29.58 $38.13 $40.07 $34.55 $52.29 $55.62 $59.15 $62.80 $66.69 $70.73 $75.06 $79.72 $84.73 $92.34Market capitalization $14,155 $11,191 $14,469 $15,273 $12,729 $19,266 $20,491 $21,791 $23,137 $24,570 $26,059 $27,655 $29,370 $31,216 $34,020EBITDA $379 $473 $549 $567 $696 $711 $761 $814 $863 $915 $960 $1,008 $1,059 $1,112 $1,167Enterprise Value $13,936 $11,114 $14,332 $15,193 $12,565 $19,063 $20,274 $21,559 $22,890 $24,309 $25,785 $27,367 $29,067 $30,898 $33,687

MultiplesPrice/Sales 11.41 8.08 9.19 8.71 6.58 9.48 9.43 9.37 9.39 9.40 9.50 9.60 9.71 9.83 10.20Price/EBITDA 37.34 23.65 26.37 26.91 18.28 27.10 26.94 26.77 26.82 26.87 27.14 27.43 27.74 28.08 29.15Price/Free Cash Flow N/A 25.21 39.81 30.01 27.69 40.64 36.18 35.96 35.68 35.74 35.76 36.14 36.55 37.00 38.40Enterprise Value/EBITDA 36.76 23.48 26.12 26.77 18.04 26.81 26.65 26.49 26.53 26.58 26.85 27.14 27.45 27.79 28.86Price/Earnings 46.99 30.46 31.33 29.76 22.16 34.12 33.92 33.71 33.77 33.83 34.17 34.54 34.93 35.36 36.70Dividend Yield 1.25% 1.72% 1.59% 1.96% 3.46% 2.26% 2.27% 2.28% 2.28% 2.28% 2.25% 2.23% 2.20% 2.18% 2.10%

Historical OverrideValuation Estimates Based On: Average w/Manual 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E

Price/Sales 8.80 $48.35 $51.74 $55.36 $58.68 $62.20 $65.31 $68.58 $72.01 $75.61 $79.39Price/EBITDA 26.51 $51.16 $54.74 $58.57 $62.08 $65.81 $69.10 $72.55 $76.18 $79.99 $83.99Price/Free Cash Flow 30.68 $39.48 $47.16 $50.46 $54.01 $57.25 $60.69 $63.73 $66.92 $70.26 $73.77Enterprise Value/EBITDA 26.24 $50.63 $54.17 $57.96 $61.44 $65.13 $68.38 $71.80 $75.39 $79.16 $83.12Price/Earnings 32.14 $49.40 $52.86 $56.56 $59.95 $63.55 $66.73 $70.07 $73.57 $77.25 $81.11

Low Price $39.48 $47.16 $50.46 $54.01 $57.25 $60.69 $63.73 $66.92 $70.26 $73.77High Price $51.16 $54.74 $58.57 $62.08 $65.81 $69.10 $72.55 $76.18 $79.99 $83.99DCF Price $52.29 $55.62 $59.15 $62.80 $66.69 $70.73 $75.06 $79.72 $84.73 $92.34

Historical Ratios and Valuation Forecasted Ratios and Valuation

Forecasted Stock Prices Based on Historical Multiples -- 10 Years

In this section we are going to examine historical and forecasted ratios (or "multiples") typically used to value stocks ‐‐ P/CF, Enterprise Value/EBITDA, etc. We first want to compare the historical trends in these ratios to the trends in their forecasted values. If our forecasted multiples are systematically increasing or decreasing our forecasts may be too optimistic or pessimistic, and our forecast assumptions may have to be adjusted. Second, we want to compare our discounted cash flow valuation estimates with those derived from the various multiples. Once again, if there is a large discrepancy between our DCF valuation estimate of the company's stock and the range of values obtained from the various multiples, we may want to adjust our forecast assumptions. 1. You will need to look up the company's year‐end stock prices and enter them in the first 5 (historical) years of the "per share value" category.2. Use the estimated DCF price per share in the forecasted period (link to your forecasted prices in cells BG47‐BP47.3. Market capitalization will be calculated as basic weighted shares x historical year‐end prices and then forecasted basic weighted shares x DCF forecasted prices.4. As with previous calculations, historical multiples use actual historical values and forecasted multiples use forecasted values. 

$40 

$50 

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$100 Forecasted

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Forecasted Per Share Stock Values

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Price/Sales and Enterprise Value/EBITDA  vs. Price

Price/Sales Enterprise Value/EBITDA DCF Price

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CI CJ CK CL CM CN CO CP CQ CR CS CT CU CV CW CX CY CZ DA DB

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Price/Earnings Ratio Dividend Yield

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argin

Gross, Operating and Net Profit Margins

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0%10%20%30%40%50%60%70%80%90%100%110%120%130%

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OE an

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IC

Return on Assets, Equity and Invested Capital

Return on Assets Return on Equity Return on Invested Capital

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d Free

 Cash Flow

NOPAT and Free Cash Flow (millions)

NOPAT Free Cash Flow

$14,000 

$16,000 

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$100 

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alue

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Economic Value Added & Market Value Added (millions)

Economic Value Added Market Value Added

$0.00 

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$2.00 

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$3.00 

EPS an

d DPS

Earnings and Dividends Per Share

Earnings Per Share Dividends Per Share

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DC DD DE DF DG DH DI DJ DK DL DM DN DO DP DQ DR DS DT DU DV

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Days to Cov

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Days to Cover Ratio (Short Interest  Volume)

Days to Cover

02,0004,0006,0008,00010,00012,00014,00016,00018,000

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usan

ds)

Short Interest (thousands of shares)

Short Interest (thousands of shares)

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Avg. Daily Volum

e 

Average Daily Trading Volume (thousands)

Average Daily Volume (thousands of shares)

($100,000)($90,000)($80,000)($70,000)($60,000)($50,000)($40,000)($30,000)($20,000)($10,000)

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Net Insider Purchases (Sales) , $, in thousands

Series2

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Historical P/E Ratio

Historical Trends: Price/Earnings Ratio

Paychex ADP ASF

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Historical Trends: Price/Sales Ratio

Paychex ADP ASF