Dealmaker’s Diary: Cash the Check From This $50B Payroll Company

Alpesh Patel|September 26, 2024

I was 12 when I bought my first stock with money I borrowed from my aunt.

It was the start of a decades-long fascination… that continues to this day.

I love learning about companies… and the story you get from their numbers.

Like the stock I’ve found for you in this week’s Dealmaker’s Diary.

It’s a $50 billion benefits company that provides payroll, insurance, and retirement planning services to business in the U.S. and Europe. All that adds up to $5 billion in annual revenue.

It cuts the paychecks of 1 in 12 American workers… and has two major tailwinds in its favor.

The company generates a ton of cash… at a rate I haven’t seen in a few years. Plus, the stock is undervalued and ready to break out of a triple top.

Get all the details on the company – including its ticker – in my latest video.

This the kind of research my clients pay thousands for… but you get it for FREE as a Total Wealth subscriber.

Click on the thumbnail below to watch.

TRANSCRIPT

Hi, friends. One of the things that I absolutely love about investing ever since I made my first investment at the age of 12 is the fact that it makes me really excited to learn about new companies, about what’s working in the world. It makes me more connected to the rest of the world. And it’s just a journey of learning and discovery.

That’s what got me excited about Paychex (PAYX).

So why this company? Well, here are some numbers which caught my eye. The company serves three-quarters of a million customers in the U.S. and Europe. It’s diversified.

It pays 1 out of every 12 American private sector employees.

And it doesn’t just work with employees. It’s a tech company with employee benefit solutions, insurance, and payroll. It also supports retirement planning and administration services.

Now with the recent half a percent cut in interest rates, I’m expecting employment to pick up.

I’m also expecting more retirement services and planning to pick up because people are getting older. We know that’s happening in Europe and in the U.S.

So the company’s in a sweet spot.

It’s got a nearly $50 billion market cap with revenues reaching $5 billion. So we’ve got the comfort of size.

Here are the other numbers which give me a lot of comfort.

On my proprietary Growth-Value-Income rating, Paychex is a 7.

That measures the valuation of a company and weighs that against growth and against dividend yields. This has got a 7.

Why is that important? Well, anything with a 7, 8, 9, or 10 on my proprietary algorithm historically has done rather well.

Not guaranteed to, but historically has tended to.

Now, the forecast P/E is the only number which concerns me.

You’re basically paying 26.7 dollars for every future forecasted estimated dollar in profits.

That’s comparable to Microsoft. So it’s a bit pricey on that measure of valuation.

However, the reason I like it is its CROCI – cash return on capital invested – at 35.3. That’s one of the highest I’ve seen in the last two or three years.

Why is that important? Goldman Sachs Wealth Management say companies in the top 25% by CROCI, which Paychex easily is, generate 30% annual returns as a basket of stocks. Of course, they’re not guaranteed to, not every year, and not every stock in the basket.

But Paychex ticks that box.

See how powerful CROCI is here.

Sortino measures the average return versus the downside risk. I’d prefer it higher, but 0.35 is not shabby. Ticks my box.

I love the volatility being 7.2%. It must be one of the least volatile companies out there. And so my risk is protected, but the growth, as I’ve already mentioned, is potentially very significant as well.

Diving a bit deeper… this is where I get excited.

Notice how in 2021 and 2022, it knocked three times on a high of about $135 to $140 but didn’t cross it.

It had a triple top, but didn’t manage to pass it.

I think the fourth time’s the charm. Given that the monthly MACD is now rising nicely, I think this one really could go up and up and up. I think it could break into that newborn territory and give you a really nice return as well.

On a discount cash flow basis, another measure of valuation, it’s nearly 30% undervalued. So that gives us a bit of a buffer, a bit of a comfort factor. It’s not one of the most important factors I look at, but I like the fact that we’ve got that there.

I hope that’s given you a lot of insights into the things I look for, why I look for them. I hope it’s been a little bit entertaining as well… and I shared some of my passions with you.

And yes, I really was 12 when I did my first-ever investment. I borrowed some money from my aunt, and, I’ve never looked back since. I just love this business.

Thank you very much.