Thursday, February 14, 2019

A Current AIM Small Cap Equity Holding: Paycom Software, Inc. (PAYC, $171.75): “Paycom? More Like Payoff” By: Nicholas Arco, AIM Student at Marquette University

Paycom Software, Inc. (PAYC, $171.75): “Paycom? More Like Payoff”
By: Nicholas Arco, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Paycom Software, Inc. (NYSE:PAYC) is a provider of cloud-based human capital management (HCM) software solutions. The SaaS platform provides customers with all the functionality they need to manage an employment life cycle from recruitment to retirement.

• PAYC recently reported earnings in which they outpaced their own guidance for fiscal ’18.

• The company continues its high growth rate paired with a high recurring revenue rate that has continuously pushed the stock past price targets from the street.

• PAYC is continuing its expansion throughout the United States as it continues to open new sales offices. 

• PAYC recently introduced new technology that will help enable employees to access important HR information with ease.

Key points:

On February 5, PAYC reported their 2018 fiscal year earnings, in which they beat revenue guidance by about $6 million. They also reported higher than expected adjusted EBITDA—$240.9 million versus an estimated $235 million—which represented about a 30% year-over-year increase. The stocked popped on this news, jumping 9% since the report date meaning this information is now priced in. Nonetheless, investors can remain confident that the company’s business model is still firing on all cylinders.

In each of the last 4 years, the company’s revenues have grown between 30-48%. Additionally, year-over-year growth numbers have ranged between 53% and 265% on the bottom line, making it one of the most profitable cloud payroll companies in the market. This presents investors with a rare combination of top line growth and profitability. PAYC also offers investors significant visibility into their top line as they have maintained a ~98% recurring revenue rate over that last 4 years.

In 2018, PAYC opened 4 new sales offices in Rochester, Salt Lake City, Columbus, and San Diego, bringing its total to 51. The company plans to open between 10 and 14 additional sales offices in the next 2 years as part of its growth strategy. Paycom has offices in 35 of the 50 largest statistical metropolitan areas in the US, yet only 5 of these areas have more than one sales team servicing them. By expanding their reach, they should be able to more effectively and efficiently attack their estimated $22.5B total addressable market.

As the US workforce becomes increasingly more mobile, the functionality of HCM software will need to advance with it. PAYC realized this and introduced its redesigned Employee Self-Service Desktop and Mobile applications. These applications can be accessed through the App Store and Google Play which makes for easy access to HR information, allowing employees to stay up-to-date. The technology is two-fold as it also allows employers to engage their workforce through trainings, surveys, and performance goals and reviews.

What has the stock done lately?

Paycom’s stock has performed well lately. As previously noted, the stock rose ~8% in the 24 hours following the company’s last earnings report. Since then the stock has leveled out a bit, now trading around $172. Investors can be confident that the solid earnings report is now priced in.

Past Year Performance:

PAYC has increased 103.77% year-over-year. Overall, the market has been strong in 2019, but PAYC has performed especially well year-to-date, rising over 40%. In contrast, the S&P 500 is only up about 8% in the new year.  

Source: FactSet
My Takeaway:

PAYC continues to perform well in the cloud-based software solutions space. The company has had historically high revenue growth, and with such a large addressable market and aggressive growth strategy, they look poised to continue their strong run. As if high revenue growth rates aren’t enough, PAYC also has high recurring revenue rates that can give investors a sense of confidence in the top line. Finally, PAYC has recently introduced new technology that will keep them relevant as we see a continued shift in large enterprises towards cloud-computing and a technologically-savvy, mobile workforce. That being said, PAYC has flown upward, more than doubling in the last 14 months, providing significant alpha to its investors. However, this rapid growth will most likely slow, perhaps leaving this as a hold for the time being.

Source: FactSet