Paycom Software: Earnings Preview; Valuation Nearing Target
Summary
- Paycom shares have risen by 25% since the author first put a "Buy" rating on the stock.
- PAYC has consistently beaten analyst estimates for EPS and revenue each quarter for the past two years.
- The stock's valuation is not as attractive as it was a couple of months ago.
tattywelshie
Shares of Paycom Software (NYSE:PAYC) are up about 25% since I put a “Buy” rating on the stock two months ago, outpacing the nearly 10% return in the S&P over that same period. Let’s catch up on the name ahead of its earnings.
Company Profile
As a refresher, PAYC is a cloud-based human capital software (HCM) firm. Its solution uses a centralized database that keeps a core system of record for payroll and human resource (HR) functions. HR departments use the product for such things as payroll, talent acquisition, onboarding, time and labor management, and other applications. Organizations with between 50 to 10,000 employees are PAYC’s primary target customer, although its largest customer has about 20,000 employees.
The company charges a subscription fee, as well as a fee per employee or transaction processed. As such, there is some seasonality to the business, where Q1 tends to be the company’s biggest quarter due to it processing things such as W-2, bonus paychecks, and affordable care act form filings. The fourth quarter also usually sees a smaller boost from bonus payrolls. PAYC also earns interest of the funds it holds for clients before they are distributed to employees.
Earnings Preview
PAYC is scheduled to report its Q2 earnings on August 1st after the bell. The stock has shown moderate volatility following its earnings, moving more than 10% in four of the past ten quarters. The stock has risen following its earnings report in only four of the past ten quarters, including dropping the past three times it has reported results. Investor reactions have ranged from a -10.0% decrease in Q1 of 2021, to a 12.2% increase in Q1 of 2022. The stock has risen each of the past three times it has reported its Q3 results.
FinBox
PAYC has beaten analyst estimates for EPS and revenue each quarter for the past two years. The revenue beats tend to be modest, ranging from 1-4%, while EPS beats have been larger.
FinBox
PAYC’s Q2 revenue estimates, meanwhile, have slowly drifted higher over the past year, and are now 4.5% higher versus a year ago. Revenue estimates are up 1.3% since mid-April and now stand at $398.3 million.
FinBox
PAYC’s Q2 EPS estimates, meanwhile, have trended up and are over 11% higher versus a year ago. Analyst expectations have increased by 2 cents since mid-April.
FinBox
ON its Q2 call, PAYC guided for revenue of between $397-399 million, representing 26% growth at the midpoint. The company is looking for adjusted EBITDA of between $152-154 million, which would be growth of about 38% at the midpoint.
While the macro environment is on everybody’s mind, especially for a payroll company that caters to SMBs, CEO Chad Richison said at a Robert W. Baird conference in June that the company was seeing no negative macro impact on its business whatsoever. He said that if there were an impact that it would show up in attrition numbers of its clients’ employees, but that it hasn’t.
At the conference, Baird analyst Mark Marcon asked Richison about PAYC’s international opportunity, while noting that some investors are worried about the incremental cost. Richison said:
"Well, first, the opportunity. As we went through the pandemic, we only charge clients for the number of employees that are paid, not the number of employees stored in our system. Some of our competitors charge for the number of employees stored in the system. And so it impacted us in a big way. I think we lost 14.5% of our current clients' employee base like within a 2-week pay period or something. So it impacted us. And then we started looking at our database. Well, if we did charge per record, what would that look at? And we found clients that look like they had 1,000 employees, you look at their database, they have 10,000 employees, and they're not even in the U.S. They were using our system and putting different data in there. And so we looked. We already have a demand because we do have clients that have international presence right now. They use us domestically, and they'll use third parties outside of that. We looked at our demand. First product that we developed - we took all of our current products with the exception of the gross to net calc in payroll. And we put it in 15 different languages to where to work in 180 countries, we, perspective. So that's what we're focused on right now. I mean people talk about the expense, but it's what we do. I mean -- and to be able to capture international for this year is currently in our guidance. … And so when you look at percent of clients or percent of revenue opportunities, larger, but also, I mean, we've only been missing one thing to do the largest companies in the world, and that's the fact that we don't have international.”
When looking at PAYC’s earnings, expect another moderate beat by the firm on both the revenue and EPS lines. Guidance and the commentary on the macro environment will be key. Any change in language on the macro environment could hurt the stock, although I’m not expecting a change. Also look for how international is progressing, as well as how well the company is attracting larger clients. Progress in these two areas would bode well for the company longer term.
I’d also continue to monitor PAYC’s sales & marketing efficiency, which is among the best in SaaS. However, Q2 is the worst period to look at this metric given the seasonality in the business, and it will be a more important metric to look at in Q3.
PAYC S&M Efficiency (Company Filings and Self)
Valuation
SaaS companies are generally valued based on a sales multiple given their high gross margins and the companies wanting to pump money back into sales and marketing to grow.
On that front, PAYC is valued at a P/S ratio of about 11.8x based on the 2023 consensus for revenue of $1.72 billion. Based on the 2024 sales consensus of $2.07 billion, it trades at a P/S multiple of 9.8x.
In the past, the company has often traded at some hefty P/S multiples, although growth is starting to slow some.
PAYC Historical P/S (FinBox)
Conclusion
Up a quick 25% since I first looked at the stock two months ago, PAYC stock is not nearly as attractively valued as it was when I first looked at. And while the company typically posts solid results, it likely doesn’t have the firepower to post a blowout quarter that sends the stock materially higher directly after earnings.
With the stock closing in on my target price of $360, I’m going to keep my rating for now, but likely will adjust it after earnings.
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