$75.93
$128.48
bear $75.93
base $103.24
bull $128.48
margin of safety $50.00
market price* $111.63
Paychex processes payroll and HR services for roughly 840,000 customers, about 800,000 of them payroll clients, across the United States and parts of Europe. Payroll clients can cancel on 30 days' notice, yet 82 to 83% stay each year, and that renewing base is the engine of the business. In April 2025 Paychex bought Paycor, a software provider to larger employers, funding it with $4.2 billion of new bonds. Fiscal 2026 (year to May 2026) was the first full year including Paycor. How we measure earnings. We take operating cash flow, strip out swings in receivables and payables, subtract stock compensation, subtract the part of capital spending needed to stand still, and subtract the cash used to fund purchased client receivables. Sales commissions that are capitalized are left in as a real, recurring cost. On that basis fiscal 2026 earnings were $1.83 billion, or $5.09 a share, compared with $4.16 in fiscal 2025 and $4.25 in fiscal 2023. We then add back the $268 million of interest paid, because shareholders own what remains after lenders are repaid and we deduct the debt separately below. That gives about $2.1 billion, or $5.84 a share, for fiscal 2026. Why we start lower, at $5.60. Fiscal 2026 was helped by one-time factors. A July 2025 tax law let Paychex deduct research and equipment costs sooner, so cash taxes were $310 million against a $551 million tax expense, and we treat about $65 million of that as non-recurring. In the latest quarter (ended August 2026), income earned on corporate funds fell about 45% from a year earlier, which trims roughly $0.07 a share. Only one full year exists since the Paycor deal, so earlier years describe a smaller business and we do not average them. Quarterly results through August 2026 support the level: revenue rose 5.9% and net income 12% against a quarter that already included Paycor. Cash flow in that quarter was lower on payables timing, which we do not treat as a change in earning power. Growth. Reported cash earnings per share rose 37% in fiscal 2026, but that reflects the acquisition and tax timing and is not a guide. Before Paycor, per-share cash earnings were roughly flat for three years ($4.35, $4.34, $4.26), though they grew about 6% a year from fiscal 2017 to 2025. Our base case starts at 3%, above the flat pre-deal trend, because the quarter filed on September 24, 2026 shows 5.9% revenue growth with Paycor in both periods, and we credit about half of that to shareholders because revenue growth has not converted fully into cash. We credit only what the business has repeatedly done: price increases, steady client replacement of the 17 to 18% lost each year, and modest cross-selling. We leave out Paycor cost savings, share gains in larger employers, new products and any margin expansion. Paycor's acquired customer relationships are being written off at $299 million a year (about $91 million before the deal); that charge is not a cash cost and is added back, but customers do leave over time, so we keep growth well below history rather than lowering the starting level. Base case: $103 a share. Cash earnings grow 3% a year for five years and 2% for five more, reaching about $7.17 a share in year ten, then stay flat. What keeps them flat afterward is the same renewal engine: about a fifth of clients must be replaced every year, which Paychex has done for decades. The business is worth about $114 a share; net debt is about $11, leaving about $103. Bear case: $76 a share. Fiscal 2027 slips 3% on lower interest income. Then comes a downturn like 2008 to 2010, when Paychex revenue fell 3%, interest earned on client funds fell 58% (from $132 million to $55 million) and net income fell 17% (from $576 million to $477 million). Applied today, a 60% drop in roughly $274 million of interest income costs about $0.35 a share after tax and a 9% decline in operating earnings costs about $0.45, taking cash earnings to about $4.75, 15% below the starting level, for two years. Growth then returns at only 2% a year, consistent with flat per-share results in fiscal 2023 to 2025 while capital spending rose from 3.1% to 4.3% of revenue, and stays flat after year ten at about $5.34. The business is worth about $87 a share; net debt about $11; the difference is about $76. Even at the trough, cash earnings of roughly $1.7 billion cover the roughly $268 million interest bill more than six times. Bull case: $128 a share. Growth of 6% a year for five years (the fiscal 2017 to 2025 pace) and 4% for five more, reaching about $9.12, then flat. The business is worth about $139 a share; net debt about $11; the difference is about $128. Debt. Paychex owes $4.6 billion of fixed-rate senior notes: $400 million at 4.25% due March 2029, $1.5 billion at 5.10% due April 2030, $1.5 billion at 5.35% due April 2032 and $1.2 billion at 5.60% due April 2035, an average of about 5.2%. Because that is below what we would expect refinancing to cost, we reduce the debt by about $139 million. We subtract the $4.6 billion adjusted to about $4.46 billion, less $601 million of corporate cash at August 31, 2026 (down from $1.09 billion in May after dividends), for net debt of about $3.86 billion, or roughly $10.82 a share on 357 million shares. Client funds held in trust belong to clients and are excluded. In none of the three cases does cash flow fall near the interest bill, and no maturity arrives before March 2029. Margin-of-safety price: $50. We are fairly, not fully, sure of the starting level: it rests on one year after the acquisition and on a large tax and payables benefit we have removed. The worst plausible path is a deep recession with falling interest income and Paycor customers leaving together; the fixed-rate, investment-grade debt and low interest burden mean the business would survive that, but the current dividend of about $4.76 a share uses roughly 90% of owner earnings, so it could be held flat or trimmed in a downturn. Our three most likely errors: the post-year-ten flat assumption (if earnings instead faded 2% a year, the base case would be about $86), the starting level (10% lower cuts the base by about $11), and Paycor retention (cutting Paycor-related earnings is not captured in the cases). Taking all three together, the base would be in the mid-$70s. The price assumes a holding period of about five years, with the dividend, about 9% of $50 each year, paid over that period. From $50, a value in five years in the mid-to-high $80s (below the base case and above the bear case) plus the dividends implies about 20% a year; if the dividend were halved and the value were $75, the implied return would be about 13%. A higher margin-of-safety price would leave no margin for a mistake in the flat long-term assumption. Change since our last view (September 1). The earlier figures were built on a different basis and are not comparable. What moved in the business: results for the quarter ended August 2026 showed continued 6% revenue growth and 12% profit growth, but corporate cash fell to $601 million, share buybacks paused, income on corporate funds declined, and the benefit from accelerated tax deductions faded to a small amount in the quarter. The annual report also showed that cash taxes ran about $240 million below the book tax charge, which we have excluded from the starting level.