The Report That Paycom Needs is Yet to Come

Paycom stock was up nearly 9.5% the morning after posting a strong earnings report. However, the report that may be more important to Paycom investors...

By Chris Markoch - MarketBeat

This story originally appeared on MarketBeat

Paycom (NYSE:PAYC) stock was up nearly 9.5% the morning after posting a strong earnings report. The company delivered a 33% year-over-year (YoY) increase in revenue. And with over $500 million in revenue, the company is offering guidance for full-year revenue between $1.036 billion and $1.038 billion. That's an increase from the company's previous guidance of between $1.017 billion and $1.019 billon and has the company on pace to have a YoY revenue gain of over 21%.

The numbers on the bottom line were even stronger. Paycom posted 97 cents in earnings per share, more than doubling the consensus estimate of 47 cents per share. Paycom has been a recovery play. The expectation is that the stock will continue to rise as employers add to their payrolls.

Paycom's strength is in its SaaS model that is allowing the company to grow profits as it adds revenue. A key reason for this is the company's retention rate, which currently sits at over 90%.

However, the report that may be more important to Paycom investors is coming on August 6. That's when the monthly jobs report is released. Early numbers released by Automatic Data Processing (NASDAQ:ADP) indicate that the private sector created 330,000 new jobs in July. That's a disappointing number that is sending equity markets lower at the start of trading.

And it's also a potential harbinger for the short-term fortunes of PAYC stock.

It's All About the Jobs

Fairly or not, PAYC stock has been closely correlated with the jobs report. In 2020, the share price rose and fell on investor sentiment about the economic outlook. And in May 2021, the stock took a nose dive in advance of what turned out to be a weak jobs report. Nevertheless, since the beginning of June, it's been nothing but blue skies for the stock after two encouraging job reports.

However, if the ADP report is accurate – and it historically has been at least directionally accurate – then this rally in Paycom stock could be short lived.

The Right Company For the Right Time

While I do believe the jobs report may be a short-term headwind for PAYC stock, I believe the long-term outlook is good. Events like the Covid-19 pandemic have a way of changing society. Paycom already had a compelling message of employee empowerment prior to the pandemic. That message is now being shouted through a bullhorn as employees – at least for the moment – have more leverage than they've had in a long time.

That's right in Paycom's wheelhouse. And I expect that it may find itself growing business as many companies find its services to be an attractive benefit for recruiting workers.

And speaking of recruitment, while perhaps best known for empowering employees with things such as vacation days, expense reports, and the like, the company also has products for talent acquisition.

PAYC Stock is a Long Play

At the time of this writing, Paycom has a market cap of just over $26 billion. However, the company has a price-to-earnings ratio of over 160 at the time of this writing. That's more than four times the current earnings multiple of the S&P 500 Index (approximately 34.35).

Does that mean that PAYC stock is overvalued? Perhaps not. There are many other things to consider. And there's no question that analysts are in love with Paycom. In the morning after its earnings report, the company received six price target increases and five of those were for a price significantly above the current target.

And in the long term, I believe Paycom will reward those expectations. But if you're thinking about hitting the buy button, I'd advise you to wait for the jobs report. The stock might look a bit more attractive after the market digests those numbers.

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