Final PAYX Report

1 University of Oregon Investment Group
February 13, 2015
Technology
Covering Analyst: Charles Pontrelli
Email: cpp@uoregon.edu
Investment Thesis
Decreasing US unemployment rates and increasing US corporate profits
will drive Paychex revenue growth.
Increasing growth rates of small- and medium-sized businesses (Paychex’s
main clients) will increase revenue growth.
Increasing development of Paychex’s human resource products, such as
Paychex Flex, will capitalize on the strong demand for human resource
outsourcing services in the industry.
Superior product offerings, coupled with competitors facing product
difficulties, will allow Paychex to increase market share in the payroll and
bookkeeping service industry.
Paychex, Inc.
Ticker: PAYX
Current Price: $47.73
Recommendation: Outperform
Price Target: $51.33
Five-Year Stock Chart
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Key Statistics
52 Week Price Range $39.80 - $48.48
50-Day Moving Average $47.02
Estimated Beta 0.79
Dividend Yield 3.20%
Market Capitalization (mm) 17,569
3-Year Revenue CAGR 4.15%
Trading Statistics
Diluted Shares Outstanding (mm) 363
Average Volume (3-Month) (mm) 2.37
Institutional Ownership 68%
Insider Ownership 10.67%
EV/EBITDA (LTM) 14.304
Margins and Ratios
Gross Margin (LTM) 75.09%
EBITDA Margin (LTM) 43.18%
Net Margin (LTM) 24.91%
Debt to Enterprise Value -

UOIG 2
University of Oregon Investment Group
Business Overview
Paychex, Inc. was founded in 1971 by B. Thomas Golisano under the name
Paymaster with the purpose to create a streamlined and easy payroll service for
small businesses. Paychex was founded and is currently headquartered in
Rochester, New York. In 1979 the company had expanded to include 18
franchises and partnerships, which eventually consolidated to form Paychex. The
company now provides payroll and human resource outsourcing services to
almost 600,000 small and medium businesses. Approximately 50% of new
customers come from referrals current clients, such as business proprietors, CPAs,
banks, and various other institutions. In 1983, Paychex went public and started
trading on the NASDAQ Stock Market under the ticker PAYX, which it continues
to trade under today. The company’s offerings include payroll processing,
insurance, human resource outsourcing services, and retirement services.
Paychex receives revenue from two sources: its services, and interest from funds
held for clients.
Services
Paychex provides a variety of services to its clients. These services include
payroll, human resource outsourcing, and accounting and finance. These services
are detailed below.
Payroll
Paychex’s payroll system is a key aspect of their service offerings. With the
payroll system, Paychex calculates, prepares, and delivers employee payroll
checks. The preparations of these payroll checks also includes the preparation of
federal, state, and local payroll tax returns. Clients have can opt for either a full-
service customer service model, or they can choose to use Paychex Online, which
is a self-service payroll system that is active 24 hours a day, seven days a week.
The services included in the Paychex Online service are Paychex Online Payroll,
Internet Time Sheet, Paychex Online Reports, and General Ledger Reporting
Service.
For larger companies, Paychex offers Major Market Services (“MMS”) that are
integrated with various Internet-based services to assist clients with payroll and
human resource needs. Paychex makes sure that all tax, payroll, and compliance
needs are met with their robust services.
Human Resource
Paychex also provides a variety of human resource services that businesses can
utilize. Companies choose to use Paychex’s HR Services in order to outsource
both employer and employee administrative needs. As of May 31, 2014, over
28,000 clients with about 766,000 client employees utilized Paychex HR Services.
Paychex also provides retirement services administration through its HR Services
product line. Some of the options available to clients are 401(k) plans, 401(k)
SIMPLE plans, SIMPLE IRAs, 401(k) plans with safe harbor provisions, profit
sharing plans, and money purchase plans.
Additionally, Paychex provides insurance services through its licensed insurance
agency, Paychex Insurance Agency, Inc. (“PIA”). PIA’s insurance offerings
include workers’ compensation, business-owner policies, commercial auto, and
health and benefits coverage, including life, vision, dental, and health. Insurance
is provided through a variety of carriers. With the current healthcare reform
Figure 2: Paychex, Inc. 2014 Revenue Breakdown
Source: Paychex 2014 10-K
Service Revenue Interest from Funds Held For Clients
Figure 1: Paychex, Inc. Headquarters
Source: Google Images
Figure 3: Paychex, Inc. Service Revenue Growth
Source: UOIG Spreads
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mandates, PIA makes sure that all of its clients understand how it will affect them
and offers comprehensive solutions to adapt to certain mandates.
Accounting and Finance
Alongside their payroll and human resource offerings, Paychex provides a variety
of accounting and finance services for small- to medium-sized businesses. One
of these services is Paychex Accounting Online, which is a cloud-based
accounting service. Paychex also offers their Paychex Payment Processing
Services, which provide various ways for small businesses to accept payment
from customers, including credit and debit processing, mobile and online
7payment, and point-of-sale processing. Paychex also operates the Paychex
Small Business Loan Resource Center, which gives businesses access to over
1,200 lenders. While relatively new, the accounting and finance services offer a
great deal that can benefit small-business owners.
Interest from Funds Held for Clients
Paychex not only receives revenue from providing its various services, but also
collects interest from funds it holds for clients. When a client needs payroll
processed for a certain pay period, Paychex will withdraw the amount from the
client’s bank account and then process the amount for the payroll. The time that
funds are held by Paychex can range from 1 day to 90 days, depending on the
service being provided and how long it takes to process the amount. During this
time, Paychex invests the funds primarily in high quality securities with AAA and
AA ratings and A-1/P-1 ratings on short-term securities.
Industry
Overview
Paychex operates in the Services sector and the Payroll and Bookkeeping Services
industry. Businesses in this industry provide outsourced payroll services as well
as bookkeeping services. There are approximately 290,344 businesses in this
industry, making it quite large. The company with the largest market share is
ADP LLC with a market share of 12.1%, followed by Paychex and Intuit Inc.,
who both hold 2.7% market share of the industry. The majority of the industry
operates in the United States because of the knowledge needed of various laws
regarding payroll, bookkeeping, and taxes.
Competition is high and is expected to increase over the next few years due to the
low barriers to entry. In the future, larger companies will be more successful in
the industry due to the large benefits of having economies of scale. Because many
companies charge a fee per unit supplied (i.e. clients are charged a fee based on
the amount of transactions performed), larger companies can reduce these fees
and provide savings to their clients. Still, it is relatively easy to enter the industry
and be successful since the industry is very fragmented and many companies in
the payroll industry focus on small, local markets.
This industry has very low capital intensity. It is estimated that for every dollar
spent on labor the industry invests about $0.03 in capital. However, this industry
requires a high degree of manual labor. Wages take up the largest percentage of
costs in this industry because of the amount of skilled labor required for payroll
processing and other administrative tasks. Still, firms are expected to increase
their capital expenditures due to the trend of many operators giving clients the
ability to submit payroll forms and other information online. These capital
expenditures are expected to be invested in a greater amount of software and
ADP, LLC 12.70%
Paychex, Inc. 2.70%
Intuit, Inc. 2.70%
Ceridian, Inc. 1.30%
Other 80.6%
Figure 5: Payroll and Bookkeeping Industry
Market Share
Source: IBIS World
4% 5%
6%
6%
14%
4%
4%
57%
Tax Preparation Bookkeeping and Compilation Services
General Accounting Services Other Services
Billing Services Tax Planning and Consulting Services
Payroll Services Sold Separately Full-Service Payroll Services
Figure 6: Breakdown of Industry Services
Source: IBIS World
Figure 4: Paychex, Inc. Interest from Funds Held
for Clients Growth
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computer systems in order to reduce the amount of manual labor required and
provide more services online to clients. Additionally, cloud computing software
is becoming the norm, as well as software on smartphones and tablets to provide
mobile business solutions. These investments will most likely cause wages to
decrease in the industry.
As mentioned above, the payroll and bookkeeping industry is going to continue
to develop their payroll software offering. Technological advancements that will
be most apparent in the industry will be the transition to widespread cloud
computing, increased online payroll services, and automatic searching and storage
of data from websites and financial documents to increase efficiencies and reduce
costs. The development of cyber security and privacy is essential in this industry,
due to the large amount of financial data that is being processed online and in the
cloud. Recently, companies have experienced data breaches. One significant
security breach was in Intuit’s TurboTax system, which had to completely shut
down across the United States in order to do damage control.
Macroeconomic factors
Declining Unemployment Rates
The largest macroeconomic factor that affects the payroll and bookkeeping
industry is the national unemployment rate of the United States. Operators in this
industry usually charge on a per-employee-processed or per-transaction-
processed basis. Because of this, payroll and bookkeeping companies’ revenues
are highly reliant on the national unemployment rate. As unemployment rates go
down, businesses in the industry receive more requests for payroll and
bookkeeping services. Therefore, revenue is inversely correlated with
unemployment rate. As of the beginning of 2015, unemployment rate is expected
to decrease and continue to decrease into the coming years. It is expected to
decrease to about 5.6% by 2019, and slowly return to the 2007 unemployment
rate of 4.6% going to the future. This will take time, though, due to the slow
recovery from the 2009 recession.
Increasing Number of Businesses
Another significant macroeconomic factor that drives the industry is the number
of businesses in the United States. Revenue in the payroll and bookkeeping
industry is directly correlated with the amount of businesses. As the number of
businesses in the US increases, there are more clients to attract. Businesses are
expected to grow 2% to 7.75 million in 2015, and continue to grow. However,
this growth might be slowed because of expected high interest rates and taxes.
These rate increases are expected as the Federal Reserve is attempting to end some
policies that were used to boost the economy after the recession.
Increasing Corporate Profits
Corporate profits refers to the total amount of profit earned by all companies in
all industries in the United States. Companies with lower profit margins are more
likely to keep their payroll and bookkeeping in-house in order to reduce costs. As
corporate profits rise, however, companies will want to outsource their payroll
and bookkeeping services. This will allow them to focus more on their main
operations and reduce administrative costs. While corporate growth rates have
slowed a little because of the increases of commodity prices and increasing of
interest rates on loans, they are still expected to increase. Corporate profits are
expected to grow on average by 2.9% annually for the next 5 years.
Source: IBIS World
Figure 7: US Unemployment Rate
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Figure 8: US Number of Businesses
Source: IBIS World
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Figure 9: US Corporate Profits
Source: IBIS World
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Competition
Competition in the industry is relatively high due to the sheer amount of
businesses that operate in the industry. However, as mentioned before, many of
these companies focus on small, local markets, so it is relatively easy to find a
market to operate in.
It is estimated that the four largest companies account for approximately 20% of
the revenue in the industry. Paychex is one of these companies. Its largest
competitors are ADP LLC, Intuit Inc., and Ceridian Inc. ADP is Paychex’s
biggest competitor by far. ADP offers very similar products and has a very similar
business model. However, while Paychex services small- to medium-sized
businesses, ADP services mainly medium- to large- sized businesses, including
multi-national corporations.
Both Paychex and ADP have been developing online and cloud-based services.
Intuit, another large competitor of Paychex, offers various payroll and tax
software to small businesses. However, they do not offer full service payroll and
tax options like ADP and Paychex. Additionally, there have been a few instances
of fraud and security breaches at Intuit. This caused Intuit to cease to accept any
tax returns through their TurboTax system for a period of time. Cyber security is
becoming increasingly necessary in the business as more financial information is
going online and into the cloud.
Going into the future, success in the industry will be determined by the companies
that can achieve economies of scale and reduce costs for their clients. Paychex
continues to develop and fine-tune their software in order to streamline their
services and reduce administrative costs. Also, because of its relative size to the
majority of other companies in the industry, Paychex has an advantage, and will
be able to reduce the per-transaction-processed fees for their clients through
economies of scale.
Strategic Positioning
Sales and Marketing
Paychex uses a direct sales force based in the markets they serve, with sales
representatives specializing in the various services in Paychex’s product portfolio.
Paychex also utilizes marketing, advertising, public relations, trade shows, and
telemarketing programs to attract new customers. In geographic areas where there
may not be a local presence, a virtual sales force is used.
Approximately 50% of all new core payroll service clients come from referrals
from current clients. Additionally, Paychex has partnered with the American
Institute of Certified Public Accountants (“AICPA”) as the provider for its AICPA
Business Solutions Program. More than 50% of the CPA firms in the US are
enrolled are participating in the Paychex Partner Program from AICPA Business
Solutions. This partnership will last until September 2016. Paychex has also
enhanced its relationships with CPAs by partnering with various state CPA
society organizations.
Paychex also provides education and assistance to clients and possible future
clients by providing free webinars, white papers, and other resources through their
website. Their website also includes online payroll sales presentations and service
and product information that serves as a source of new sales. Additionally,
Paychex’s payroll and insurance services websites provide information regarding
Life Cycle Stage Mature
Revenue Volatility Low
Capital Intensity Low
Industry Assistance Low
Concentration Level Low
Regulation Level Medium
Technology Change Medium
Barriers to Entry Low
Industry Globalization Low
Competition Level High
Source: IBIS World
Figure 10: Industry Structure
Source: IBIS World
Figure 11: Sector vs. Industry Costs
11.2 10.5
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Sector (2014)
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Figure 12: Net Income vs. SG&A Expense
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health care reform, in order for clients to be informed and find solutions for their
business.
Markets and Competition
The majority of Paychex’s revenue comes from the United States. However,
Paychex also services some businesses in Germany. They currently have a joint-
venture arrangement in Brazil to provide payroll and human resource services.
While there is a great deal of competitors in the market, Paychex has a much larger
client base than the majority of them, with only one primary national competitor
(ADP) in the market. Competition in the industry is primarily based on service
responsiveness, product quality and reputation, breadth of product and service
offerings, and price. Paychex is widely known for its fantastic customer service
and product offerings, as well as its affordability.
Paychex is known for providing excellent service to its clients. At the end of the
2014 fiscal year, Paychex had an 82% client retention rate. The company
continues to strive for greater customer satisfaction by increasing the ease of use
of their products and services, as well as rolling out new products and services to
meet the needs of current and new customers. Some of their new products are
their Paychex Accounting Online service, their Biz2Credit online resource, and
Paychex Payment Processing Services.
Software Development
Paychex continually improves current software, as well as develop new software.
The company is currently investing in their Paychex Next Generation platform,
believing it to be a key building block for future success. On top of this, they are
focusing much of their investments into their mobile platforms and cloud-
computing applications as the payroll and bookkeeping industry trends towards
these systems. The Paychex Next Generation suite includes a software-as-a-
service (“SaaS”) platform that streamlines workforce management. This
platform, combined with the various mobile apps allow Paychex to provide
superior customer service by tailoring to each customers’ specific needs.
Business Growth Strategies
Geographic Growth
Paychex operates primarily in the United States, but also has offices in Germany,
and is currently part of a joint-venture in Brazil. Paychex recently increased their
presence in Germany by acquiring a small payroll provider. It will increase their
revenue and client base in Germany. They also are currently in a joint-venture
arrangement in Brazil. Brazil is a very large market with a rapidly growing
economy. With over five million small businesses, there is significant opportunity
for outsourcing payroll and human resource services. Additionally, Paychex
continues to increase its customer base domestically through its local sales
representatives, as well as its virtual sales force to reach customers where there is
no local Paychex branch.
As Paychex becomes more established overseas, they will begin expanding to
other countries. However, this may take some time. Because of the laws and
regulations concerning payroll, bookkeeping, and taxes differs greatly from
country to country, it can be difficult to establish operations outside of the United
States. However, Paychex is committed expanding into new markets and
Figure 13: Client Base Distribution
Business Size
Estimated Market
Distribution
Paychex, Inc. Distribution
of Client Base
<10 91% 65%
10-19 4% 17%
20-49 3% 12%
50+ 2% 6%
Source: Paychex, Inc. 10-K
Figure 14: Capital Expenditures Projections
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geographies, especially emerging markets, in order to further grow the business
and capitalize on the demand for outsourcing payroll services.
Organic Growth
Paychex has had consistent revenue growth the past few years, and is expected to
continue having this stead growth in the coming years. They are performing
relatively well compared to their peers. Both ADP and Intuit have been
performing worse than expected due to product difficulties and lack of client
retention. Paychex is known for having great customer service, while ADP, its
largest competitor, is known to provide sub-par customer service.
Funding for organic growth is planned to increase in the future. Recently,
Paychex has been investing a great deal in the development of its software and
the expansion and upgrade of various operating facilities. In the fiscal years 2012,
2013, and 2014, Paychex allocated $2.6 million, $6.5 million, and $4.7 million,
respectively, of funding to purchase equipment and software from EMC
Corporation in order to improve Paychex’s product offerings and efficiency. This
equipment and software will also be used to support Paychex’s continued client
and ancillary product growth. Also, Paychex has been developing its Paychex
Next Generation platform to improve customer experiences. They are doing this
by improving the user interface of their platform, having centralized data for all
of its functions and applications, and give clients access to mobile technology.
Paychex has also focused a great deal on its Human Resource Service products.
Demand for human resource outsourcing services has increased the last few years
as corporate profits rise. Paychex has a diverse set of products capitalize on this
demand, such as their new, minimum-premium health insurance product that was
recently introduced. This, combined with their growing retirement-services
products, put Paychex in a great position with a diversified portfolio of products.
Acquisitions
Paychex has engaged in a few acquisitions in recent history. In 2014 Paychex
acquired SurePayroll, an online payroll service provider. Paychex identified
growth opportunities and the benefits of offering a self-service, online-based
payroll processing solution to small businesses. This acquisition allowed Paychex
to enter the self-service payroll market with competitors ADP and Intuit. Paychex
also acquired ExpenseWire in 2012, which was a leading SaaS based expense
management solution. Paychex partakes in acquisitions when they identify a
business or product that can either improve and develop its current products, or
add new products to its already diversified product portfolio. This way, Paychex
can enter more markets in the payroll and bookkeeping industry.
Management and Employee Relations
Martin Mucci – President and CEO
Martin Mucci joined Paychex in October 2002 when he was hired as the senior
vice president of operations. On September 30, 2010 Mr. Mucci assumed the role
of president and chief executive officer. Before joining Paychex, he served as the
CEO of Frontier Telephone of Rochester, NY. Mr. Mucci holds a bachelor’s
degree in accounting from St. John Fisher College, and received his MBA at the
University of Rochester.
Figure 16: Paychex Online System
Figure 17: SurePayroll Logo
Figure 18: ExpenseWire Logo

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B. Thomas Golisano – Chairman of the Board of Paychex, Inc.
B. Thomas Golisano is the founder of Paychex, Inc., and is currently the Chairman
of the Board of Directors. Mr. Golisano founded Paychex in 1971 with $3000.
In 2004 he retired from his position as president and CEO. Mr. Golisano has an
associate’s degree from Alfred State College. He currently holds approximately
10.4% of ownership in Paychex.
Mark Bottini – Senior Vice President of Sales
Currently the Senior Vice President of Sales, Mark Bottini joined Paychex in
October 2011. Mr. Bottini is responsible for leading all payroll and human
resource service sales for the company. Before coming to Paychex, Mr. Bottini
was the vice president of sales for Ricoh, North America. He has a bachelor’s
degree in marketing from Long Beach State University.
Efrain Rivera – Senior Vice President, CFO, and Treasurer
Efrain Rivera joined Paychex in June 2011 as senior vice president, chief financial
officer, and treasurer. Prior to joining Paychex, Mr. Rivera was the corporate vice
president and CFO at Bausch & Lomb. He was also the vice president of finance
and administration at Houghton College. Mr. Rivera holds a Doctor of
Management degree from Case Western Reserve University, an MBA from the
University of Rochester, a JD from New York University, and a bachelor of
science from Houghton College.
Management Guidance
Management provides guidance on revenues and net income for the fiscal year of
2015 for their operations. The revenue model in the appendices is in line with
management guidance. The second fiscal quarter of the 2015 fiscal year exceed
management guidance. Management expects that for the fiscal year of 2015 there
will be an estimated revenue growth between 8 and 10 percent. Guidance also
expects a net income growth of 6 to 8 percent.
It should be noted that, historically, management has given relatively accurate
guidance. Actual growth percentages usually fall in line with the guidance that
management gives at the beginning of the fiscal year.
Portfolio Strategy
Paychex is not currently held in any of the University of Oregon Investment
Group’s portfolios. Currently, the Tall Firs portfolio is currently underweight in
both large cap and technology. By adding Paychex, the Tall Firs portfolio would
be better aligned with the benchmark. With strong management guidance,
consistent top-line and bottom-line growth, and competitors underperforming in
the industry, Paychex is a great value buy.
Recent News
Paychex Embraces Strong Jobs Data – Investor’s Business Daily
– February 4th, 2015
Paychex reported fiscal second-quarter profits up 9% from the year before.
Revenue increased 10% from the previous quarter. These growth rates were due
to the release of Paychex Flex, as well as new data reflecting decreasing
unemployment rates.
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Figure 19: Total Executive Compensation vs. Net
Income
Source: UOIG Spreads & Morningstar
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Martin Mucci Efrain Rivera Mark A. Bottini
Figure 20: Individual Executive Compensation
Source: UOIG Spreads & Morningstar
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Figure 21: Dividend by Quarter
Source: Paychex, Inc. 10-K

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Paychex Declares Quarterly Dividend– Business Wire –
January 16th, 2015
The Paychex Board of Directors declared a quarterly dividend of $.38 per share
that would be payable on February 17th
, 2015. Paychex has consistently given out
dividends to its shareholders since 1988, making it very desirable for
shareholders.
Paychex Named One of the 2015 Best Companies to Work for in
New York State – Business Wire – January 9th, 2015
Paychex, Inc. announced that it had been named one of the Best Companies to
Work for in New York State for 2015. It has now made the list two years in a
row. The award is a reflection of the company’s strong culture and commitment
to employees, as well as the great benefits and employee programs.
Catalysts
Upside
Diversified product offerings and development of current products will
allow Paychex to increase their client base and boost revenues.
Increasing investments to develop online and cloud-computing software
will position Paychex to be a strong competitor in the market.
Decreasing unemployment rates will cause businesses to demand more
payroll and human resource outsourcing services, thereby increasing
Paychex’s revenue.
Increasing US corporate profits will cause firms to switch from in-house
payroll to outsourced payroll services in order to focus on core
operations.
Downside
Strong competition and low barriers to entry poise a threat to Paychex.
With growing transitions to online and cloud services, Paychex may be
more susceptible to data breaches.
Both Paychex’s service revenue and revenue from interest on funds held
for clients can be significantly impacted by changes in government
regulations and policies.
Because of its operations in Germany and Brazil, Paychex is susceptible
to changes from fluctuating exchange rates.
Comparable Analysis
Comparable companies were screened for historical growth rates of EPS and
revenue, beta, D/E, as well as gross profit margins. Other metrics considered were
industry, sector, company size, market capitalization, and headquarter location.
All comparable companies are based in the United States. Historical revenue
growth for the comparable companies is similar to that of PAYX, and is a good
indicator of performance. Product offerings and how much of a competitor they
are also played a large role in deciding on comparable companies.
ADP, LLC (ADP) – 30%
ADP, LLC, provides technology-based outsourcing solutions to employers
worldwide. The company operates through Employer Services and Professional
Figure 22: Best Companies to Work for in New
York 2014 Logo
Figure 23: ADP, LLC Logo
Figure 24: Intuit, Inc. Logo

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Employer Organization (PEO) Services segments. ADP specializes in payroll
services, benefit administration services, human capital management solutions,
and human resources outsourcing. – Yahoo Finance
ADP was chosen because it is Paychex’s main competitor. Not only this, but it
has very similar product offerings. Additionally, both companies have little to no
long term debt, similar beta, and have similar capital structures. ADP would have
had a higher weighting, but its projected revenue, EBITDA, and EPS growth rates
for 2016 are different.
Intuit, Inc. (INTU) – 25%
Intuit, Inc. provides business and financial management solutions for small
businesses, consumers, and accounting professionals in the United States,
Canada, the United Kingdom, Australia, India, and Singapore. The company
provides QuickBooks payroll services, merchant services, GoPayment mobile
solutions, and TurboTax. – Yahoo Finance
Intuit was chosen as a comparable companies because it is one of the largest
operators in the industry, and is a direct competitor to Paychex. Paychex has
begun to compete with them more since it has expanded its online self-service
product offerings. It also has very similar margins. Additionally, it has a similar
beta and market cap.
Insperity, Inc. (NSP) – 15%
Insperity, Inc. provides an array of human resources (HR) and business solutions
to enhance business performance for small and medium-sized companies in the
United States. It provides HR business offerings through its Workforce
Optimization solution, and also provides payroll services, performance
management, recruiting services, employee benefits, workers’ compensation, and
government compliance. – Yahoo Finance
This company was weighted as a comparable to Paychex because it in the same
industry, it has the same D/E ratio, a very similar beta, and very similar sales.
Additionally, its product offerings are similar to Paychex’s, with more of an
emphasis on outsourced human resource services. Insperity’s weighting is lower
than that of ADP and Intuit because it is much smaller than Paychex.
Cognizant Technology Solutions Corp. (CTSH) – 15%
Cognizant Technology Solutions Corporation provides information technology
(IT), consulting, and business process services worldwide. The company operates
in four segments: Financial Services, Healthcare, Manufacturing/Retail/Logistics,
and Other. Its products include IT strategy consulting and program management
consulting services, enterprise data management services, clinical data
management, equity research support, and order management. – Yahoo Finance
Cognizant Technology Solutions is included in the comparable companies
because it has a similar D/E ratio as Paychex, it operates in the same industry, and
it has somewhat similar product offerings. However, it has a different beta and
has a much larger market cap than Paychex, so it was weighted lower.
Figure 25: Insperity, Inc. Logo
Figure 26: Cognizant Technology Solutions Corp.
Logo
Figure 27: Robert Half International, Inc. Logo

UOIG 11
Robert Half International, Inc. (RHI) – 15%
Robert Half International Inc. provides staffing and risk consulting services in
North America, South America, Europe, Asia, and Australia. The company
operates through three segments: Temporary and Consultant Staffing, Permanent
Placement Staffing, and Risk Consulting and Internal Audit Services. It offers
temporary staffing in the accounting, tax, and finance areas, as well as IT contract
consultants. – Yahoo Finance
Robert Half International has an identical D/E ratio, it operates in the same
industry and sector as Paychex, and has had very similar EPS growth the past 5
years. However, it has a drastically different beta and is about half the size of
Paychex. Therefore, it was weighted lower.
Discounted Cash Flow Analysis
Revenue Model
The revenue model was created by breaking out Paychex, Inc. into its service
revenue and its interest on funds held for clients. Interest on funds held for clients
was projected as a percentage of revenue. Historical data was analyzed to project
out interest received.
Service revenue for Paychex was forecasted using a Simple Linear Regression
model. Historical service revenue from 2002 to 2014 was used, and then
regressed against estimated US unemployment rate, estimated non-farm business
employees, and estimated corporate profits going into 2024. The estimated US
unemployment rate is what is forecasted in the future by the Bureau of Labor
Statistics. Estimated non-farm business employees was projected using a Simple
Linear Regression model, as was US corporate profits.
Service revenue was regressed against these factors because it has been shown by
historical data that these factors are highly correlated with revenue. Once the
regression was created, it was adjusted to also take into account management
guidance going forward.
Beta
Beta was calculated using a weighted average of 1and 3 year daily betas. The 1,
and 3 year daily betas were calculated by regressing Paychex’s historical stock
prices against the historical stock prices of the S&P 500. Each of these betas was
then assigned a weighting, with the one year daily receiving a weighting of 50%,
and the three year daily receiving a weighting of 50%. They were weighted
evenly because they are believed to be the best indicator of future volatility. Both
Hamada and Vasicek betas were also calculated, however they were not used.
Operating Expenses
Operating was projected out by analyzing historical data, and then trending down
linearly. The payroll industry requires specialized labor to conduct its operations.
Because of this, wages make up the majority of their costs. As Paychex continues
to develop their current software and implement new software, the need for skilled
labor will gradually decrease. While this decrease will ever be extremely
significant, it was taken into account when projecting operating expenses.
Multiple R 0.86
R Square 0.74
Adjusted R Square 0.72
Standard Error 0.03
Observations 47
Figure 28: Regression Statistics
Source: Paychex, Inc. Spreads
Figure 29: Beta
Figure 30: Projected Operating Expenses as a
Percentage of Revenue
22.50%
23.00%
23.50%
24.00%
24.50%
25.00%
25.50%
26.00%
2015E 2017E 2019E 2021E 2023E
PercentageofRevenue(%)
Beta SE Weighting
1 Year Daily 0.77 0.06 50.00%
3 Year Daily 0.81 0.03 50.00%
5 Year Daily 0.85 0.02 0.00%
3 Year Weekly 0.94 0.08 0.00%
5 Year Weekly 0.84 0.05 0.00%
3 Year Daily Vasicek - Comps 0.94 0.00%
3 Year Daily Vasicek - ETF 0.88 0.00%
3 Year Daily Hamada - Comps 1.04 0.00%
3 Year Daily Hamada - ETF 0.90 0.00%
Paychex, Inc. Beta 0.79

UOIG 12
Additionally, management has spoken about increasing efficiencies in its
operations in the coming years to reduce costs.
Selling, General, and Administrative
Selling, General, and Administrative costs were projected out by analyzing
historical financial data and using percentage of revenue. There is a small decline
in SG&A as a percentage of revenue year-over-year as Paychex will try to
increase efficiencies and streamline its operations through developments with
software and services.
Depreciation and Amortization
Depreciation and Amortization was projected into the terminal year as a
percentage of beginning PP&E. These percentages were calculated by looking at
historical financial data, as well as management’s guidance.
Net Working Capital
Net Working Capital was projected off of historical financial data for Paychex.
The projected values were forecasted as a percentage of revenue.
Capital Expenditures
Capital Expenditures, like Net Working Capital, were also projected using a
percentage of revenue method. Percentages increase year-over-year due to
management’s plans to increase spending on software development and
computing equipment to enhance its product offerings.
Tax Rate
The tax rate for Paychex was calculated by looking at historical financial data.
Additionally, the majority of Paychex’s business is in the United States, therefore
causing them to have a higher tax rate. Because of these reasons, a steady tax rate
of 35% was used going into the terminal year.
Recommendation
Paychex is a very strong player in the industry. Steady revenue growth,
commitment to customer service and quality, as well as its expansion into the
online service market, positions it to be successful amid large competition.
Additionally, decreasing unemployment rates, increasing corporate profit levels,
and strong business growth going into the future will drive revenue growth. A
weighting of 50% was given to both the discounted cash flow analysis and the
comparable analysis, giving a final price target of $51.33, implying an
undervaluation of 7.54%. Because of this price target, it is recommended that
Paychex will outperform and should be added into the Tall Firs portfolio.
Figure 31: Beta Sensitivity Table
Figure 32: WACC Sensitivity Table
Figure 33: Final Implied Price
Source Implied Price Weighting
Discounted Cash Flow Analysis $50.62 50%
Comparable Analysis 52.04 50%
Weighted Implied Price $51.33
Current Price $47.73
Undervalued 7.54%
ImpliedPrice
Terminal Growth Rate
51 2.0% 2.5% 3.0% 3.5% 4.0%
6.95% 44.40 47.24 50.70 55.00 60.49
7.00% 44.36 47.20 50.66 54.96 60.45
7.06% 44.31 47.16 50.61 54.91 60.40
7.10% 44.28 47.12 50.58 54.88 60.37
7.15% 44.24 47.09 50.54 54.84 60.33
WACC
ImpliedPrice
Terminal Growth Rate
51 2.0% 2.5% 3.0% 3.5% 4.0%
0.70 49.68 53.44 58.14 64.17 72.19
0.75 46.60 49.82 53.77 58.76 65.23
0.79 44.32 47.16 50.62 54.92 60.40
0.85 41.45 43.85 46.74 50.28 54.70
0.90 39.27 41.37 43.87 46.89 50.61
AdjustedBeta

February 13, 2015University of Oregon Investment Group
UOIG 13
Appendix 1 – Comparable Analysis
Multiple Implied Price Weight
EV/EBIT $51.16 33.33%
EV/(EBITDA-Capex) $51.04 33.33%
Market Cap/Net Income = P/E $53.92 33.33%
Price Target $52.04
Current Price 47.73
Undervalued 9.03%
Comparables Analysis PAYX ADP INTU NSP CTSH RHI
($ in millions)
Paychex, Inc. ADP, LLC Intuit Inc. Insperity, Inc.
Cognizant
Technology
Solutions
Corporation
Robert Half
International Inc.
Stock Characteristics Max Min Median Weight Avg. 30.00% 25.00% 15.00% 15.00% 15.00%
Current Price $87.83 $42.70 $60.81 $72.03 $48.40 $86.44 $87.83 $42.70 $57.44 $60.81
Beta 1.35 0.79 0.95 1.03 0.79 0.91 0.98 0.89 1.17 1.35
Size
Short-TermDebt 2,173.00 - 6.50 758.85 - 2,173.00 - - 700.00 13.00
Long-TermDebt 937.50 - 11.50 269.01 - 11.50 499.00 - 937.50 1.20
Cash and Cash Equivalent 4,015.80 282.00 2,203.00 2,407.69 529.00 4,015.80 2,203.00 282.00 3,775.00 291.00
Non-Controlling Interest - - - - - - - - - -
Preferred Stock - - - - - - - - - -
Diluted Basic Shares 609.00 25.30 285.50 331.52 363.00 482.00 285.50 25.30 609.00 136.00
Market Capitalization 41,664.08 1,080.31 25,075.38 25,417.78 17,569.20 41,664.08 25,075.38 1,080.31 34,980.96 8,270.16
Enterprise Value 39,173.98 798.31 23,627.38 23,902.50 17,040.20 39,173.98 23,627.38 798.31 32,843.46 7,981.32
Growth Expectations
% Revenue Growth 2015E 16.06% 4.43% 7.93% 8.00% 8.36% 7.93% 4.67% 4.43% 16.06% 9.20%
% Revenue Growth 2016E 19.45% (9.79%) 8.72% 1.81% 5.80% (9.79%) (3.60%) 9.50% 19.45% 8.72%
% EBITDA Growth 2015E 14.52% (11.10%) 8.16% 5.25% 9.52% 8.16% 1.55% (11.10%) 12.70% 14.52%
% EBITDA Growth 2016E 16.64% (25.20%) 9.95% (2.50%) 5.91% (6.89%) (25.20%) 12.50% 16.64% 9.95%
% EPS Growth 2015E 18.72% (20.86%) 9.06% 6.88% 10.87% 8.65% 9.06% (20.86%) 18.72% 15.63%
% EPS Growth 2016E 19.09% (28.94%) 12.74% (2.51%) 7.89% (6.69%) (28.94%) 19.09% 13.08% 12.74%
Profitability Margins
Gross Margin 85.93% 16.85% 40.96% 49.07% 74.51% 42.96% 85.93% 16.85% 40.16% 40.96%
EBIT Margin 39.82% 2.04% 18.22% 18.74% 39.82% 18.22% 34.51% 2.04% 18.37% 10.59%
EBITDA Margin 43.65% 3.06% 20.32% 20.79% 43.65% 20.32% 37.77% 3.06% 20.32% 11.63%
Net Margin 25.49% 1.15% 12.42% 12.60% 25.49% 12.42% 22.48% 1.15% 14.02% 6.52%
Credit Metrics
Interest Expense $31.00 $0.00 $2.00 $9.85 $0.00 $6.00 $31.00 $0.00 $2.00 $0.00
Debt/EV 0.06 - 0.02 0.03 - 0.06 0.02 - 0.05 0.00
Leverage Ratio 0.88 - 0.29 0.46 - 0.88 0.29 - 0.79 0.03
Interest Coverage Ratio #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! 413.33 54.90 #DIV/0! 1,042.50 #DIV/0!
Operating Results
Revenue $12,207.00 $2,356.00 $4,695.00 $7,385.70 $2,729.41 $12,207.00 $4,506.00 $2,356.00 $10,263.00 $4,695.00
Gross Profit $5,244.00 $397.00 $3,872.00 $3,507.50 $2,033.70 $5,244.00 $3,872.00 $397.00 $4,122.00 $1,923.00
EBIT $2,224.00 $48.00 $1,555.00 $1,420.45 $1,086.90 $2,224.00 $1,555.00 $48.00 $1,885.00 $497.00
EBITDA $2,480.00 $72.00 $1,702.00 $1,574.95 $1,191.26 $2,480.00 $1,702.00 $72.00 $2,085.00 $546.00
Net Income $1,516.00 $27.00 $1,013.00 $973.85 $695.68 $1,516.00 $1,013.00 $27.00 $1,439.00 $306.00
Capital Expenditures $297.00 $16.00 $194.00 $182.90 $104.53 $297.00 $194.00 $16.00 $223.00 $63.00
Multiples
EV/Revenue 6.24x 0.34x 3.20x 3.06x 6.24x 3.21x 5.24x 0.34x 3.20x 1.70x
EV/Gross Profit 8.38 2.01 6.10 5.89 8.38 7.47 6.10 2.01 7.97 4.15
EV/EBIT 17.61 15.19 16.63 16.60 15.68 17.61 15.19 16.63 17.42 16.06
EV/EBITDA 15.80 11.09 14.62 14.43 14.30 15.80 13.88 11.09 15.75 14.62
EV/(EBITDA-Capex) 17.95 14.26 16.52 16.56 15.68 17.95 15.67 14.26 17.64 16.52
Market Cap/Net Income = P/E 40.01 24.31 27.03 28.14 25.25 27.48 24.75 40.01 24.31 27.03

UOIG 14
Appendix 2 – Discounted Cash Flow Analysis
Appendix 3 – Revenue Model
Revenue Model Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
($ in millions) 2010A 2011A 2012A 2013A 2014A 08/31/2014A 11/30/2014A 02/28/2015E 05/31/2015E 2015E 08/31/2015E 11/30/2015E 02/29/2016E 05/31/2016E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E
Service Revenue 1945.80 2036.20 2186.20 2285.20 2478.20 656.60 665.90 668.63 696.36 2687.49 693.96 705.72 710.22 734.73 2844.63 3006.21 3170.05 3330.13 3474.00 3610.18 3742.31 3866.93 3987.19
% Growth (3.06%) 4.65% 7.37% 4.53% 8.45% 8.87% 9.81% 6.81% 6.51% 8.45% 5.69% 5.98% 6.22% 5.51% 5.85% 5.68% 5.45% 5.05% 4.32% 3.92% 3.66% 3.33% 3.11%
% of Total Revenue 97.25% 97.69% 98.04% 98.24% 98.38% 98.47% 98.46% 98.35% 98.57% 98.46% 98.51% 98.50% 98.40% 98.60% 98.50% 98.54% 98.58% 98.60% 98.62% 98.63% 98.64% 98.65% 98.65%
Interest on Funds Held for Clients 55.00 48.10 43.60 41.00 40.70 10.20 10.40 11.23 10.09 41.92 10.51 10.71 11.56 10.40 43.18 44.47 45.81 47.18 48.60 50.06 51.56 53.10 54.70
% Growth (27.15%) (12.55%) (9.36%) (5.96%) (.73%) 2.00% 4.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%
% of Total Revenue 2.75% 2.31% 1.96% 1.76% 1.62% 1.53% 1.54% 1.65% 1.43% 1.54% 1.49% 1.50% 1.60% 1.40% 1.50% 1.46% 1.42% 1.40% 1.38% 1.37% 1.36% 1.35% 1.35%
Total Revenue $2,000.80 $2,084.30 $2,229.80 $2,326.20 $2,518.90 $666.80 $676.30 $679.86 $706.46 $2,729.41 $704.47 $716.43 $721.78 $745.13 $2,887.81 $3,050.68 $3,215.85 $3,377.32 $3,522.59 $3,660.23 $3,793.87 $3,920.03 $4,041.89
% Growth (3.94%) 4.17% 6.98% 4.32% 8.28% 8.76% 9.72% 6.73% 6.46% 8.36% 5.65% 5.93% 6.17% 5.47% 5.80% 5.64% 5.41% 5.02% 4.30% 3.91% 3.65% 3.33% 3.11%
DiscountedCash FlowAnalysis Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Total Revenue $2,000.80 $2,084.30 $2,229.80 $2,326.20 $2,518.90 $666.80 $676.30 $679.86 $706.46 $2,729.41 $704.47 $716.43 $721.78 $745.13 $2,887.81 $3,050.68 $3,215.85 $3,377.32 $3,522.59 $3,660.23 $3,793.87 $3,920.03 $4,041.89
% YoY Growth (3.94%) 4.17% 6.98% 4.32% 8.28% 8.76% 9.72% 6.73% 6.46% 8.36% 5.65% 5.93% 6.17% 5.47% 5.80% 5.64% 5.41% 5.02% 4.30% 3.91% 3.65% 3.33% 3.11%
Operating Expenses 567.10 564.90 572.30 573.10 627.50 167.80 173.10 174.38 180.43 695.71 177.10 183.26 184.99 190.16 735.52 770.60 805.57 838.93 867.61 893.83 918.49 941.20 957.52
% Revenue 28.34% 27.10% 25.67% 24.64% 24.91% 25.16% 25.60% 25.65% 25.54% 25.49% 25.14% 25.58% 25.63% 25.52% 25.47% 25.26% 25.05% 24.84% 24.63% 24.42% 24.21% 24.01% 23.69%
Gross Profit $1,433.70 $1,519.40 $1,657.50 $1,753.10 $1,891.40 $499.00 $503.20 $505.47 $526.03 $2,033.70 $527.36 $533.17 $536.79 $554.97 $2,152.30 $2,280.08 $2,410.28 $2,538.39 $2,654.98 $2,766.40 $2,875.37 $2,978.83 $3,084.36
Gross Margin 71.66% 72.90% 74.33% 75.36% 75.09% 74.84% 74.40% 74.35% 74.46% 74.51% 74.86% 74.42% 74.37% 74.48% 74.53% 74.74% 74.95% 75.16% 75.37% 75.58% 75.79% 75.99% 76.31%
Selling General and Administrative 622.40 644.30 705.80 750.10 803.70 205.00 207.00 211.44 219.00 842.44 216.41 219.16 224.33 230.77 890.67 939.92 989.84 1,038.52 1,082.49 1,123.33 1,163.58 1,201.49 1,237.63
% Revenue 31.11% 30.91% 31.65% 32.25% 31.91% 30.74% 30.61% 31.10% 31.00% 30.87% 30.72% 30.59% 31.08% 30.97% 30.84% 30.81% 30.78% 30.75% 30.73% 30.69% 30.67% 30.65% 30.62%
Depreciation and Amortization 86.50 88.70 97.80 98.20 105.00 26.50 26.00 25.83 26.03 104.36 26.36 26.56 26.84 27.11 106.87 111.24 116.27 121.97 128.09 134.30 140.49 146.62 152.36
% of PP&E Beginning 31.51% 32.94% 31.68% 30.28% 30.35% 7.74% 7.50% 7.50% 7.50% 30.50% 7.50% 7.50% 7.50% 7.50% 30.41% 30.40% 30.35% 30.30% 30.25% 30.20% 30.15% 30.10% 30.00%
Earnings Before Interest & Taxes $724.80 $786.40 $853.90 $904.80 $982.70 $267.50 $270.20 $268.21 $280.99 $1,086.90 $284.59 $287.45 $285.62 $297.10 $1,154.76 $1,228.93 $1,304.17 $1,377.90 $1,444.40 $1,508.78 $1,571.30 $1,630.73 $1,694.38
% Revenue 36.23% 37.73% 38.29% 38.90% 39.01% 40.12% 39.95% 39.45% 39.77% 39.82% 40.40% 40.12% 39.57% 39.87% 39.99% 40.28% 40.55% 40.80% 41.00% 41.22% 41.42% 41.60% 41.92%
Interest Expense - - - - - - - - - - - - - - - - - - - - - - -
% Revenue - - - - - - - - - - - - - - - - - - - - - - -
Net Interest (Income) (4.50) (5.80) (6.40) (6.60) (5.40) 1.40 1.40 - - 2.80 - - - - - - - - - - - - -
% Revenue (.22%) (.28%) (.29%) (.28%) (.21%) .21% .21% - - .10% - - - - - - - - - - - - -
Earnings Before Taxes 729.30 792.20 860.30 911.40 988.10 266.10 268.80 268.21 280.99 1084.10 284.59 287.45 285.62 297.10 1154.76 1228.93 1304.17 1377.90 1444.40 1508.78 1571.30 1630.73 1694.38
% Revenue 36.45% 38.01% 38.58% 39.18% 39.23% 39.91% 39.75% 39.45% 39.77% 39.72% 40.40% 40.12% 39.57% 39.87% 39.99% 40.28% 40.55% 40.80% 41.00% 41.22% 41.42% 41.60% 41.92%
Less Taxes (Benefits) 252.30 276.90 312.30 342.40 360.60 97.60 98.60 93.87 98.35 388.42 99.61 100.61 99.97 103.98 404.17 430.12 456.46 482.26 505.54 528.07 549.96 570.75 593.03
TaxRate 34.59% 34.95% 36.30% 37.57% 36.49% 36.68% 36.68% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00%
Net Income $477.00 $515.30 $548.00 $569.00 $627.50 $168.50 $170.20 $174.34 $182.64 $695.68 $184.98 $186.84 $185.65 $193.11 $750.60 $798.80 $847.71 $895.63 $938.86 $980.71 $1,021.35 $1,059.97 $1,101.35
Net Margin 23.84% 24.72% 24.58% 24.46% 24.91% 25.27% 25.17% 25.64% 25.85% 25.49% 26.26% 26.08% 25.72% 25.92% 25.99% 26.18% 26.36% 26.52% 26.65% 26.79% 26.92% 27.04% 27.25%
Add Back: Depreciation and Amortization 86.50 88.70 97.80 98.20 105.00 26.50 26.00 25.83 26.03 104.36 26.36 26.56 26.84 27.11 106.87 111.24 116.27 121.97 128.09 134.30 140.49 146.62 152.36
Add Back: Interest Expense*(1-TaxRate) - - - - - - - - - - - - - - - - - - - - - - -
Operating Cash Flow $563.50 $604.00 $645.80 $667.20 $732.50 $195.00 $196.20 $200.17 $208.68 $800.04 $211.34 $213.40 $212.49 $220.22 $857.46 $910.04 $963.98 $1,017.60 $1,066.95 $1,115.01 $1,161.84 $1,206.59 $1,253.71
% Revenue 28.16% 28.98% 28.96% 28.68% 29.08% 29.24% 29.01% 29.44% 29.54% 29.31% 30.00% 29.79% 29.44% 29.55% 29.69% 29.83% 29.98% 30.13% 30.29% 30.46% 30.62% 30.78% 31.02%
Current Assets 3,792.30 3,793.90 4,759.60 4,294.40 4,460.20 4,312.70 4,330.90 4,354.76 4,753.74 4,753.74 4,550.64 4,554.08 4,763.19 5,015.01 5,015.01 5,368.59 5,686.60 5,987.98 6,268.45 6,527.29 6,777.36 7,016.07 7,242.66
% Revenue 189.54% 182.02% 213.45% 184.61% 177.07% 646.78% 640.38% 640.54% 672.90% 174.17% 645.97% 635.66% 659.92% 673.04% 173.66% 175.98% 176.83% 177.30% 177.95% 178.33% 178.64% 178.98% 179.19%
Current Liabilities 3,742.00 3,788.30 4,745.70 4,266.20 4,438.90 4,283.80 4,279.30 4,350.48 4,761.66 4,761.66 4,567.34 4,612.04 4,796.39 5,011.89 5,011.89 5,389.94 5,717.15 6,021.08 6,297.69 6,566.09 6,827.06 7,078.01 7,329.96
% Revenue 187.03% 181.75% 212.83% 183.40% 176.22% 642.44% 632.75% 639.91% 674.02% 174.46% 648.34% 643.75% 664.52% 672.62% 173.55% 176.68% 177.78% 178.28% 178.78% 179.39% 179.95% 180.56% 181.35%
Net Working Capital $50.30 $5.60 $13.90 $28.20 $21.30 $28.90 $51.60 $4.28 ($7.91) ($7.91) ($16.70) ($57.96) ($33.20) $3.13 $3.13 ($21.35) ($30.55) ($33.10) ($29.24) ($38.80) ($49.70) ($61.94) ($87.30)
% Revenue 2.51% .27% .62% 1.21% .85% 4.33% 7.63% .63% (1.12%) (.29%) (2.37%) (8.09%) (4.60%) .42% .11% (.70%) (.95%) (.98%) (.83%) (1.06%) (1.31%) (1.58%) (2.16%)
Change in Working Capital ($27.90) ($44.70) $8.30 $14.30 ($6.90) $7.60 $22.70 ($47.32) ($12.20) ($29.21) ($8.78) ($41.26) $24.76 $36.33 $11.04 ($24.48) ($9.20) ($2.55) $3.86 ($9.56) ($10.90) ($12.24) ($25.37)
Capital Expenditures 61.30 100.50 89.60 98.70 84.10 24.90 20.70 28.55 30.38 104.53 29.02 30.31 30.39 31.59 121.31 128.43 135.71 142.86 149.36 155.56 161.62 167.39 172.99
% Revenue 3.06% 4.82% 4.02% 4.24% 3.34% 3.73% 3.06% 4.20% 4.30% 3.83% 4.12% 4.23% 4.21% 4.24% 4.20% 4.21% 4.22% 4.23% 4.24% 4.25% 4.26% 4.27% 4.28%
Acquisitions - 126.40 6.00 21.30 9.30 27.50 - - - 27.50 - - - - - - - - - - - - -
% Revenue 0.00% 6.06% .27% .92% .37% 4.12% - - - 1.01% - - - - - - - - - - - - -
UnleveredFree Cash Flow $530.10 $421.80 $541.90 $532.90 $646.00 $135.00 $152.80 $218.93 $190.50 $697.23 $191.10 $224.36 $157.35 $152.30 $725.11 $806.09 $837.47 $877.29 $913.73 $969.01 $1,011.12 $1,051.44 $1,106.08
DiscountedFree Cash Flow $215.23 $184.11 $181.58 $209.58 $144.50 $137.49 $679.77 $659.69 $645.52 $628.02 $622.12 $606.38 $589.01 $578.78

UOIG 15
Appendix 4 – Working Capital Model
Working Capital Model Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Total Revenue $2,000.80 $2,084.30 $2,229.80 $2,326.20 $2,518.90 $666.80 $676.30 $679.86 $706.46 $2,729.41 $704.47 $716.43 $721.78 $745.13 $2,887.81 $3,050.68 $3,215.85 $3,377.32 $3,522.59 $3,660.23 $3,793.87 $3,920.03 $4,041.89
Current Assets
Accounts Receivable 186.60 161.10 142.40 133.40 149.40 168.90 205.60 157.05 166.72 166.72 166.75 168.08 167.60 173.91 173.91 185.18 197.78 206.35 215.93 225.84 235.22 244.22 252.62
Days Sales Outstanding A/R 34.04 28.21 23.37 20.93 21.65 23.30 27.66 20.79 21.71 22.36 21.78 21.35 20.90 21.47 21.98 22.16 22.45 22.30 22.37 22.52 22.63 22.80 22.81
% of Revenue 9.33% 7.73% 6.39% 5.73% 5.93% 25.33% 24.31% 23.10% 23.60% 6.11% 23.67% 23.46% 23.22% 23.34% 6.02% 6.07% 6.15% 6.11% 6.13% 6.17% 6.20% 6.23% 6.25%
Prepaid Expenses 25.50 29.40 35.20 36.60 46.70 47.40 48.80 49.02 51.57 51.57 50.72 51.58 51.97 53.65 53.65 56.74 58.85 60.79 62.35 63.69 64.88 65.86 66.69
Days Prepaid Expense Outstanding 4.65 5.15 5.78 5.74 6.77 6.54 6.57 6.49 6.72 6.92 6.62 6.55 6.48 6.62 6.78 6.79 6.68 6.57 6.46 6.35 6.24 6.15 6.02
% of Revenue 1.27% 1.41% 1.58% 1.57% 1.85% 7.11% 7.22% 7.21% 7.30% 1.89% 7.20% 7.20% 7.20% 7.20% 1.86% 1.86% 1.83% 1.80% 1.77% 1.74% 1.71% 1.68% 1.65%
Deferred Income Taxes 3.80 5.90 1.60 2.30 12.00 - - - - - - - - - - - - - - - - - -
Days Deferred Income Taxes Outstanding 5.50 7.78 1.88 2.45 12.15 - - - - - - - - - - - - - - - - - -
% of Revenue .19% .28% .07% .10% .48% - - - - - - - - - - - - - - - - - -
Prepaid Income Taxes 6.70 1.40 5.60 17.20 17.20 - 7.40 - - - - - - - - - - - - - - - -
Days Prepaid Income Taxes Outstanding 9.69 1.85 6.56 18.34 17.41 - 6.83 - - - - - - - - - - - - - - - -
% of Revenue .33% .07% .25% .74% .68% - 1.09% - - - - - - - - - - - - - - - -
Interest Receivable 28.70 29.40 30.60 32.40 36.30 29.60 36.40 33.99 35.32 35.32 35.22 35.82 36.09 37.26 37.26 39.35 41.48 43.57 45.44 47.22 48.94 50.57 52.14
% of Revenue 1.43% 1.41% 1.37% 1.39% 1.44% 4.44% 5.38% 5.00% 5.00% 1.29% 5.00% 5.00% 5.00% 5.00% 1.29% 1.29% 1.29% 1.29% 1.29% 1.29% 1.29% 1.29% 1.29%
Funds Held for Clients 3541.00 3566.70 4544.20 4072.50 4198.60 4066.80 4032.70 4114.70 4500.13 4500.13 4297.95 4298.60 4507.54 4750.20 4750.20 5087.32 5388.49 5677.27 5944.73 6190.55 6428.33 6655.43 6871.21
% of Revenue 176.98% 171.12% 203.79% 175.07% 166.68% 609.90% 596.29% 605.23% 637.00% 164.88% 610.10% 600.00% 624.50% 637.50% 164.49% 166.76% 167.56% 168.10% 168.76% 169.13% 169.44% 169.78% 170.00%
Total Current Assets $3,792.30 $3,793.90 $4,759.60 $4,294.40 $4,460.20 $4,312.70 $4,330.90 $4,354.76 $4,753.74 $4,753.74 $4,550.64 $4,554.08 $4,763.19 $5,015.01 $5,015.01 $5,368.59 $5,686.60 $5,987.98 $6,268.45 $6,527.29 $6,777.36 $7,016.07 $7,242.66
% of Revenue 189.54% 182.02% 213.45% 184.61% 177.07% 646.78% 640.38% 640.54% 672.90% 174.17% 645.97% 635.66% 659.92% 673.04% 173.66% 175.98% 176.83% 177.30% 177.95% 178.33% 178.64% 178.98% 179.19%
Long Term Assets
Net PP&E Beginning 274.53 269.30 308.70 324.30 346.00 342.20 346.60 344.40 347.12 342.20 351.47 354.13 357.88 361.42 351.47 365.91 383.11 402.54 423.43 444.70 465.96 487.09 507.86
Capital Expenditures 61.30 100.50 89.60 98.70 84.10 24.90 20.70 28.55 30.38 104.53 29.02 30.31 30.39 31.59 121.31 128.43 135.71 142.86 149.36 155.56 161.62 167.39 172.99
Acquisitions - 126 6 21 9 28 - - - 28 - - - - - - - - - - - - -
Depreciation and Amortization 86.50 88.70 97.80 98.20 105.00 26.50 26.00 25.83 26.03 104.36 26.36 26.56 26.84 27.11 106.87 111.24 116.27 121.97 128.09 134.30 140.49 146.62 152.36
Net PP&E Ending 269.30 308.70 324.30 346.00 342.20 346.60 344.40 347.12 351.47 351.47 354.13 357.88 361.42 365.91 365.91 383.11 402.54 423.43 444.70 465.96 487.09 507.86 528.50
Total Current Assets & Net PP&E $4,061.60 $4,102.60 $5,083.90 $4,640.40 $4,802.40 $4,659.30 $4,675.30 $4,701.88 $5,105.21 $5,105.21 $4,904.77 $4,911.95 $5,124.61 $5,380.92 $5,380.92 $5,751.70 $6,089.14 $6,411.41 $6,713.16 $6,993.25 $7,264.46 $7,523.94 $7,771.15
% of Revenue 203.00% 196.83% 228.00% 199.48% 190.65% 698.76% 691.31% 691.60% 722.65% 187.04% 696.24% 685.61% 709.99% 722.15% 186.33% 188.54% 189.35% 189.84% 190.57% 191.06% 191.48% 191.94% 192.27%
Current Liabilities
Accounts Payable 37.30 45.40 69.70 42.70 48.80 40.10 39.80 40.11 45.57 45.57 43.82 46.21 45.69 48.81 48.81 53.39 57.24 61.13 64.82 68.45 72.08 75.66 79.22
Days Payable Outstanding 24.01 29.33 44.57 27.20 28.39 21.99 20.92 20.70 23.23 23.97 22.76 22.95 22.23 23.61 24.22 25.29 25.94 26.60 27.27 27.95 28.65 29.42 30.20
% of Revenue 1.86% 2.18% 3.13% 1.84% 1.94% 6.01% 5.88% 5.90% 6.45% 1.67% 6.22% 6.45% 6.33% 6.55% 1.69% 1.75% 1.78% 1.81% 1.84% 1.87% 1.90% 1.93% 1.96%
Accrued Charges 163.20 172.50 130.90 138.20 171.70 156.10 174.40 171.39 172.16 172.16 172.74 180.33 180.37 177.86 177.86 187.62 200.99 214.46 227.21 239.75 252.29 264.60 276.87
Days Charges Outstanding 95.71 97.72 67.88 67.25 77.98 70.05 76.67 72.95 72.32 74.80 73.43 74.88 72.36 70.91 72.89 72.86 74.11 75.37 76.61 77.90 79.14 80.60 81.65
% of Revenue 8.16% 8.28% 5.87% 5.94% 6.82% 23.41% 25.79% 25.21% 24.37% 6.31% 24.52% 25.17% 24.99% 23.87% 6.16% 6.15% 6.25% 6.35% 6.45% 6.55% 6.65% 6.75% 6.85%
Income Taxes Payable 17.00 14.90 13.90 8.10 6.60 9.50 14.50 15.64 16.25 16.25 16.20 16.48 16.60 17.14 17.14 18.91 21.55 24.65 26.77 29.65 33.01 36.06 39.21
Days Taxes Outstanding 24.59 19.64 16.29 8.63 6.68 8.95 13.38 14.99 15.20 15.31 14.97 14.90 14.95 15.16 15.48 16.05 17.23 18.66 19.33 20.49 21.91 23.13 24.13
% of Revenue .85% .71% .62% .35% .26% 1.42% 2.14% 2.30% 2.30% .60% 2.30% 2.30% 2.30% 2.30% .59% .62% .67% .73% .76% .81% .87% .92% .97%
Deferred Revenue 3.40 3.00 3.00 5.20 6.90 - - - - - - - - - - - - - - - - - -
% of Revenue .17% .14% .13% .22% .27% - - - - - - - - - - - - - - - - - -
Client Fund Obligations 3479.90 3513.90 4494.40 4037.70 4167.10 4030.10 4000.30 4072.35 4474.69 4474.69 4281.75 4315.29 4499.60 4712.19 4712.19 5070.84 5374.98 5655.32 5910.56 6157.24 6396.08 6625.64 6856.25
% of Revenue 173.93% 168.59% 201.56% 173.57% 165.43% 604.39% 591.50% 599.00% 633.40% 163.94% 607.80% 602.33% 623.40% 632.40% 163.18% 166.22% 167.14% 167.45% 167.79% 168.22% 168.59% 169.02% 169.63%
Other Liabilities 41.20 38.60 33.80 34.30 37.80 48.00 50.30 50.99 52.98 52.98 52.83 53.73 54.13 55.88 55.88 59.18 62.39 65.52 68.34 71.01 73.60 76.05 78.41
% of Revenue 2.06% 1.85% 1.52% 1.47% 1.50% 7.20% 7.44% 7.50% 7.50% 1.94% 7.50% 7.50% 7.50% 7.50% 1.94% 1.94% 1.94% 1.94% 1.94% 1.94% 1.94% 1.94% 1.94%
Total Current Liabilities $3,742.00 $3,788.30 $4,745.70 $4,266.20 $4,438.90 $4,283.80 $4,279.30 $4,350.48 $4,761.66 $4,761.66 $4,567.34 $4,612.04 $4,796.39 $5,011.89 $5,011.89 $5,389.94 $5,717.15 $6,021.08 $6,297.69 $6,566.09 $6,827.06 $7,078.01 $7,329.96
% of Revenue 187.03% 181.75% 212.83% 183.40% 176.22% 642.44% 632.75% 639.91% 674.02% 174.46% 648.34% 643.75% 664.52% 672.62% 173.55% 176.68% 177.78% 178.28% 178.78% 179.39% 179.95% 180.56% 181.35%

UOIG 16
Appendix 5 – Discounted Cash Flows Analysis Assumptions
DiscountedFree Cash FlowAssumptions
TaxRate 35.00% Terminal Growth Rate 3.00%
Risk Free Rate 1.95% Terminal Value 24,685
Beta 0.79 PVof Terminal Value 12,292
Market Risk Premium 6.45% Sumof PVFree Cash Flows 6,082
% Equity 100.00% FirmValue 18,374
% Debt 0.00% Total Debt 0
Cost of Debt 0.00% Cash & Cash Equivalents 529
CAPM 7.06% Market Capitalization 18,374
WACC 7.06% Fully Diluted Shares 363
Terminal Risk Free Rate 2.51% Implied Price $50.62
Terminal CAPM 7.62% Current Price $47.73
Terminal WACC 7.62% Undervalued 6.05%
Source Implied Price Weighting
Discounted Cash Flow Analysis $50.62 50%
Comparable Analysis 52.04 50%
Weighted Implied Price $51.33
Current Price $47.73
Undervalued 7.54%
Considerations
Avg. Industry Debt / Equity 10.00%
Avg. Industry TaxRate 34.41%
Current Reinvestment Rate (3.51%)
Reinvestment Rate in Year 2019E -0.43%
Implied Return on Capital in Perpetuity Reinvest More
Terminal Value as a % of Total 66.9%
Implied 2015E EBITDA Multiple 15.4x
Implied Multiple in Year 2024E 6.7x
Free Cash Flow Growth Rate in Year 2024E 4.94%

UOIG 17
Appendix 6 –Sensitivity Analysis
ImpliedPrice Undervalued/(Overvalued)
Terminal Growth Rate Terminal Growth Rate
51 2.0% 2.5% 3.0% 3.5% 4.0% 0 2.0% 2.5% 3.0% 3.5% 4.0%
0.70 49.68 53.44 58.14 64.17 72.19 0.70 4.08% 11.96% 21.80% 34.43% 51.24%
0.75 46.60 49.82 53.77 58.76 65.23 0.75 (2.37%) 4.37% 12.66% 23.11% 36.67%
0.79 44.32 47.16 50.62 54.92 60.40 0.79 (6.99%) (1.00%) 6.28% 15.33% 26.89%
0.85 41.45 43.85 46.74 50.28 54.70 0.85 (13.17%) (8.12%) (2.07%) 5.34% 14.59%
0.90 39.27 41.37 43.87 46.89 50.61 0.90 (17.73%) (13.33%) (8.09%) (1.76%) 6.03%
ImpliedPrice Undervalued/(Overvalued)
51 2.0% 2.5% 3.0% 3.5% 4.0% 0 2.0% 2.5% 3.0% 3.5% 4.0%
6.95% 44.40 47.24 50.70 55.00 60.49 6.95% (6.98%) (1.02%) 6.22% 15.23% 26.73%
7.00% 44.36 47.20 50.66 54.96 60.45 7.00% (7.06%) (1.11%) 6.14% 15.15% 26.64%
7.06% 44.31 47.16 50.61 54.91 60.40 7.06% (7.16%) (1.20%) 6.04% 15.05% 26.55%
7.10% 44.28 47.12 50.58 54.88 60.37 7.10% (7.22%) (1.27%) 5.98% 14.98% 26.48%
7.15% 44.24 47.09 50.54 54.84 60.33 7.15% (7.31%) (1.35%) 5.90% 14.90% 26.40%
Undervalued/(Overvalued) Undervalued/(Overvalued)
$50.62 2.00% 2.50% 3.00% 3.50% 4.00% 0 2.0% 2.5% 3.0% 3.5% 4.0%
1.85% 44.40 47.24 50.70 54.99 60.48 1.85% (6.99%) (1.03%) 6.21% 15.22% 26.72%
1.90% 44.36 47.20 50.66 54.96 60.44 1.90% (7.07%) (1.11%) 6.13% 15.14% 26.64%
1.95% 44.32 47.16 50.62 54.92 60.40 1.95% (7.15%) (1.20%) 6.05% 15.06% 26.55%
2.00% 44.28 47.12 50.58 54.88 60.37 2.00% (7.23%) (1.28%) 5.97% 14.97% 26.47%
2.05% 44.24 47.08 50.54 54.84 60.33 2.05% (7.31%) (1.36%) 5.89% 14.89% 26.39%
Additional Sensitivity Tables Additional Senstivity Tables
51 2.0% 2.5% 3.0% 3.5% 4.0% 6.05% 2.00% 2.50% 3.00% 3.50% 4.00%
6.35% 44.97 47.92 51.51 56.00 61.76 6.35% (5.78%) .39% 7.92% 17.33% 29.39%
6.40% 44.64 47.53 51.06 55.45 61.07 6.40% (6.47%) (.41%) 6.98% 16.18% 27.95%
6.45% 44.32 47.16 50.62 54.92 60.40 6.45% (7.15%) (1.20%) 6.05% 15.06% 26.55%
6.50% 44.00 46.79 50.18 54.39 59.75 6.50% (7.82%) (1.97%) 5.14% 13.95% 25.18%
6.55% 43.68 46.43 49.75 53.87 59.11 6.55% (8.48%) (2.73%) 4.24% 12.87% 23.84%
MarketRisk
Premium
RsikFreeRate
RiskFreeRate
AdjustedBeta
AdjustedBeta
MarketRisk
Premium
WACC
WACC

UOIG 18
Appendix 7 – Sources
BusinessWire
FactSet
Federal Reserve Economic Data
Financial Visualizations Website
IBIS World
Investor’s Business Daily
Google Images
Morningstar
Paychex, Inc. 10-K
Paychex, Inc. 10-Q
Paychex, Inc. Second Quarter Earnings Conference Call
Paychex, Inc. Website
Wall Street Journal
Yahoo Finance

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