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Bull of the Day: Paycom Software (PAYC)

Strong growth, and a Shark Tank investor, send this HCM cloud ninja to $500 and 30X sales

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This story originally appeared on Zacks

Paycom Software PAYC is a $30 billion provider of integrated HR services for corporations. Shares busted out to new highs above $400 last month after another stellar earnings report and closed above $500 for the first time on Thursday.



Founded in 1998, the company offers analytics that manage the complete employment life cycle from recruitment to retirement with cloud-based human capital management (HCM) SaaS solutions for employee records, payroll, and talent management processes.



Oklahoma City-based Paycom serves more than 23,500 clients in all 50 states, or nearly 12,700 customers based on Parent Company Grouping. Its human resource services include retirement services administration, workers’ compensation administration, employee benefit solutions, professional employer organization and other administrative services for businesses.



Paycom’s HCM solution offers a full suite of applications that generally falls within the following categories: talent acquisition, time and labor management, payroll, talent management and HR management.



Its HCM software streamlines and automates many of the day-to-day record-keeping processes and provides a framework for HR staff to manage benefits administration and payroll, map out succession planning and document such things as personnel actions and compliance with industry and/or government regulations.

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Ideally, the cloud-based HCM reduces the administrative burden on employers and increases employee productivity and retention.



Another Great Quarter of Growth



Paycom reported second-quarter 2021 results on August 3, with adjusted earnings of 97 cents per share beating the Zacks Consensus Estimate by 16.9% and jumping 56.5% year over year.



The company generated revenues of $242.1 million, which increased 33.3% from the year-earlier period and surpassed the consensus mark of $232.2 million by over 4%. This year-over-year upswing was mainly driven by new client additions and continued focus on cross selling to existing clients.



Adjusted gross profit climbed 34.5% from the year-ago period to $206.9 million. Moreover, adjusted gross margin expanded 70 basis points (bps) on a year-on-year basis to 85.4%.



Paycom Software's adjusted EBITDA increased 42.2% year on year to $87 million. Further, adjusted EBITDA margin advanced 220 bps to 35.9%.



Revenue guidance for the year was bumped up to a range $1.036-$1.038 billion, vs the consensus of $1.02B. Yes, the stock is richly-priced at 29 times sales, like a lot of SaaS companies with 30% growth.



And PAYC is actually being given a higher relative valuation since its topline growth is only 23-24% this year and next. I'll conjecture why this might be coming up. First, let's see those price target bumps!

 

Analyst Reactions: Let's Go to $500



While most analyst price targets were above $400 before this report -- and tend to be 12-month projections on growth and valuation -- clearly investors loved the company's growth outlook enough to take shares there right away. Here were some bullish analysts looking for upside after the conference call, and before shares leaped up to $440 the next day...



Oppenheimer analyst Brian Schwartz raised his price target on Paycom to $500 from $475 and kept an Outperform rating on the shares. He noted the company reported a robust Q2 which exceeded expectations across key metrics and produced an impressive recurring revenue beat "despite a tight labor market."



"Paycom continues driving strong growth via its leading technology and self-service vision, best-in-class sales engine, and because COVID has accelerated the demand for digital self-service payroll technologies," Schwartz surmised.



Jefferies analyst Samad Samana raised the firm's price target on Paycom to $500 from $470 and kept a Buy rating on the shares after the company's Q2 total revenue, recurring revenue and EBITDA beat consensus forecasts and its Q3 and FY21 guidance came in above expectations as well. Samana believes "investors will reward the return to greater than 30% growth."



FinTech... from HR and Payroll?



Currently at the top of Paycom's corporate website, they show a handset with all kinds of employee benefit functions to access at the scroll and tap of one's fingers.



The caption reads "Tomorrow's Technology. Today. Comprehensive HR and Payroll Software."



And when you scroll down, you come across this claim about employee-managed data: "Your employees can access their info through easy-to-use tech, 24/7."



This includes requesting time off, seeing compensation, expenses, documents, and even performance.



This may be one reason that Paycom has such a rich valuation as they help corporations merge into the FinTech universe that their employees-as-consumers are now accustomed to with apps and access at their fingertips.



It certainly makes sense since we can access everything else in our financial lives this way.



Bigger competitor Workday WDAY who is approaching $6 billion in revenues next year -- and was born of the PeopleSoft pioneers -- only trades at 12X sales growing 18%. They don't appear to claim prowess with a digital app for employee engagement with their data.



Interestingly enough, one of the oldest pioneers in the HR space is Paychex PAYX with expertise serving companies of less than 1,000 employees. Paychex launched in 1971 and went public in 1983, and I'm sure many Boomers and GenX-ers saw that mark on their paystub.



I recently saw CEO Martin Mucci on CNBC's TechCheck to discuss the his company's "50 years of FinTech," and how the company stays relevant and competitive in the digital app world. You gotta love him for essentially staking claim to the ground of "we were doing fintech before you were born!"



By the way, PAYX trades under 10X sales -- approaching $4.5 billion -- while it grows in modest single digits. I would not ignore them because the right partner could take their access to American's small businesses -- employers and employees -- and explode the FinTech app opportunities.



Speaking of the broader FinTech arena, I did a little thing this week on all the innovations flooding into the market from hundreds of small startups that are putting traditional banks and financial transaction companies on notice about their dying tenure...



FinTech Unicorns: How to Spot Early Winners



And now that I think of it, the investor love for Paycom that is pushing it over $500 and nearly 30X sales may be due to one very smart and financially savvy woman: Barbara Corcoran.



I just recalled that the Shark Tank investor does commercials for them. God bless her if she got a few tens of thousands of shares at 2019 prices under $200.

What I didn't have time or room here to address is what these so-called HCM firms are doing with employee education and training that helps workers advance their careers whether they stay or go.

And then there's "financial literacy" where some companies go beyond just giving a 401k with a match to teaching their employees how to organize and manage their entire financial lives. I'll be doing more homework and content in this area soon.

So be sure to check out the article and video linked above and then click + Follow up above to be certain you are notified when I do more research on the exploding disruptive innovation in the FinTech arena.



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Paycom Software, Inc. (PAYC): Free Stock Analysis Report

 

Paychex, Inc. (PAYX): Free Stock Analysis Report

 

Workday, Inc. (WDAY): Free Stock Analysis Report

 

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