Paychex, Inc.PAYXNASDAQ

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DCF Valuation

DCF Valuation Summary

Strong Buy

Fair Value: $132.26 per share(market-calibrated)

+37.6%

Upside to Fair Value

Current

$96.15

Pure Model

$135.54

Fair Value

$132.26

Bull Case

$167.85

Bear Case

$108.14

Market Reality Check

Model Terminal Growth

2.25%

Market-Implied Growth

0.50%

Calibrated Growth

1.81%

Fair value uses 75% model / 25% market-implied terminal growth. Pure model: $135.54.

What's Driving This Ratingfor PAYX

✓

CapEx already efficient

CapEx at 2.67% of revenue is already at or below sector maintenance level. No normalization needed — cash conversion is already strong.

✓

Premium margins already priced in

EBIT margin of 46.80% is already well above sector average. The model holds this level — there's limited room for margin expansion to drive upside. Valuation depends primarily on revenue growth.

⚠

Analyst growth decelerates sharply

Revenue growth drops from 16.61% in Year 1 to 2.25% by Year 5 (per analyst consensus). This growth deceleration is a key reason the model may undervalue the stock if growth re-accelerates.

🎯

Market pricing in lower growth than model

The market implies only 0.50% perpetual growth — 175bps below the model's 2.25%. This suggests the market sees headwinds or risks not in the model.

✓

Strong cash flow conversion

Year 10 FCF/EBITDA conversion of 72.02% indicates efficient cash generation. FCF reaches $3.1B by Year 10 (36.15% FCF margin).

Weighted Average Cost of Capital (WACC)

Cost of Equity (CAPM)

Risk-Free Rate (Rf)4.50%

Beta (β)0.89

Market Risk Premium4.50%

*Using current implied premium (4.5% per Damodaran 2026), not historical (6.5%)

Cost of Equity (Re)8.50%

Cost of Debt

Pre-tax Cost of Debt1.00%

Tax Rate23.83%

After-tax Cost of Debt0.76%

Equity Weight (E/V)87.34%

Debt Weight (D/V)12.66%

WACC Calculation

WACC = (E/V × Re) + (D/V × Rd × (1-Tc))

WACC = (87.34% × 8.50%) + (12.66% × 0.76%)

= 7.52%

10-Year Free Cash Flow Projections(showing years 1, 3, 5, 7, 10)

Year	Year 1	Year 3	Year 5	Year 7	Year 10
Revenue	$6.5B	$7.3B	$7.7B	$8.1B	$8.6B
EBIT	$3.0B	$3.4B	$3.6B	$3.8B	$4.0B
Tax	$725M	$810M	$861M	$900M	$963M
NOPAT	$2.3B	$2.6B	$2.8B	$2.9B	$3.1B
+ Depreciation	$221M	$247M	$262M	$274M	$293M
- Capex	$173M	$194M	$206M	$215M	$230M
- Δ NWC	$94M	$40M	$17M	$18M	$19M
Free Cash Flow	$2.3B	$2.6B	$2.8B	$2.9B	$3.1B
Discount Factor	0.930	0.804	0.696	0.602	0.484
Present Value	$2.1B	$2.1B	$1.9B	$1.8B	$1.5B

FCF Formula: Free Cash Flow = NOPAT + Depreciation - Capex - Change in Net Working Capital

Terminal Value Calculation

Perpetuity Growth Method

Year 10 FCF$3.1B

Terminal Growth Rate2.25%

WACC7.52%

TV = FCF₁₀ × (1+g) / (WACC-g)

Terminal Value$60.5B

PV of Terminal Value$29.3B

Exit Multiple Method

Year 10 EBITDA$4.3B

Exit Multiple (EV/EBITDA)18.0x

TV = EBITDA₁₀ × Exit Multiple

Terminal Value$78.0B

PV of Terminal Value$37.8B

Valuation Summary

Perpetuity Growth Method

PV of Projected FCFs$18.7B

PV of Terminal Value$29.3B

Enterprise Value$48.0B

(-) Net Debt$3.4B

Equity Value$44.6B

Shares Outstanding360M

Price per Share$123.80

Exit Multiple Method

PV of Projected FCFs$18.7B

PV of Terminal Value$37.8B

Enterprise Value$56.4B

(-) Net Debt$3.4B

Equity Value$53.0B

Shares Outstanding360M

Price per Share$147.27

Pure Model Fair Value

$135.54

Average of perpetuity growth and exit multiple methods (before market calibration)

Sensitivity AnalysisPrice per Share

WACC ↓ / Growth →	1.25%	1.75%	2.25%	2.75%	3.25%
5.52%	$171.04	$179.33	$190.15	$204.88	$226.10
6.52%	$146.81	$151.68	$157.70	$165.32	$175.26
7.52%	$128.71	$131.83	$135.54	$140.02	$145.55
8.52%	$114.43	$116.54	$118.98	$121.85	$125.26
9.52%	$102.73	$104.22	$105.91	$107.85	$110.10

How to read: This table shows how the valuation changes with different WACC (discount rate) and terminal growth rate assumptions. Green = undervalued, Red = overvalued.

Scenario Analysis

Bear Case

$108.14

12.5% vs current

• -25% vs analyst consensus
• Terminal growth: 2.0%
• Beta: 1.11

Base Case

$135.54

41.0% vs current

• Analyst consensus
• Terminal growth: 2.3%
• Beta: 0.89

Bull Case

$167.85

74.6% vs current

• +25% vs analyst consensus
• Terminal growth: 2.8%
• Beta: 0.76

Key Assumptions & Drivers• Industrials Sector

Growth Assumptions (Select Years)

Year 1 Revenue Growth16.61%

Year 3 Revenue Growth5.71%

Year 5 Revenue Growth2.25%

Year 7 Revenue Growth2.25%

Year 10 Revenue Growth2.25%

Terminal Growth Rate2.25%

Margin & Efficiency

Current EBIT Margin46.80%

Tax Rate23.83%

Historical Capex / Rev2.67%

NWC / Revenue10.20%

Key Drivers: Revenue growth, operating margin expansion, capex efficiency, and working capital management are the primary drivers of cash flow generation. Terminal value assumptions significantly impact final valuation.

Institutional-Grade Methodology

Actual Company Data: Revenue, EBIT, Capex, NWC, Tax Rate, Interest Expense, Beta

Market Assumptions: Risk-free: 4.5% (10Y), MRP: 4.5% (Damodaran 2026), Exit: 18x EV/EBITDA (Industrials sector)

This DCF model is for informational purposes only. Projections are based on assumptions that may not materialize. Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.

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