PAYC Stock Study (5-20-24)

Posted by Mark on June 14, 2024 at 06:40 | Last modified: May 18, 2024 15:13

I recently did a stock study on Paycom Software Inc. (PAYC) with a closing price of $182.28.

M* writes:

     > Paycom is a fast-growing provider of payroll and human capital
     > management software primarily targeting clients with 50-10,000
     > employees in the United States. Paycom was established in 1998
     > and services about 19,500 clients as of 2023, based on parent
     > company grouping. Alongside its core payroll software, Paycom
     > offers various HCM add-on modules, including time and
     > attendance, talent management, and benefits administration.

Since 2016, this medium-size company has grown sales and earnings at annualized rates of 25.7% and 30.9%, respectively (’14 and ’15 excluded due to small bases that would otherwise result in even higher growth rates). Lines are up, straight, and narrowing except for an EPS decline in ’20 (FY ends Dec 31).

Over the last decade, PTPM leads industry and peer averages while generally trending higher from 6.4% (’14) to 27.9% (’23) with a last-5-year mean of 26.6%. ROE also leads peer and industry averages while ranging from 8.6% in ’14 to 41.5% in ’17 with a last-5-year mean of 26.7%. Having no long-term debt, Debt-to-Capital is much lower than peer and industry averages: last-5-year mean is 3.2%.

Current Ratio is 1.13 but Quick Ratio is only 0.13. M* gives an “Exemplary” rating for Capital Allocation and assigns a “Narrow” economic moat to the company. Value Line gives a B++ rating for Financial Strength.

With regard to sales growth:

• YF projects YOY 10.4% and 11.6% for ’24 and ’25, respectively (based on 20 analysts).
• Zacks projects YOY 10.4% and 11.2% for ’24 and ’25, respectively (9 analysts).
• Value Line projects 11.7% per year for ’23-’28.
• CFRA projects 10.5% YOY and 11.3% per year for ’24 and ’23-’25, respectively.
• M* gives a 2-year annualized ACE of 11.0% and projects 12.0% per year through 2028 in its analyst report.

I am forecasting below the range at 9.0% per year.

With regard to EPS growth:

• MarketWatch projects 7.6% and 11.6% per year for ’23-’25 and ’23-’26, respectively (based on 23 analysts).
• Nasdaq.com projects 14.4% YOY and per year for ’25 and ’24-’26 (8, 8, and 2 analysts for ’24, ’25, and ’26).
• Seeking Alpha projects 4-year annualized growth of 10.4%.
• YF projects YOY 0.5% and 13.5% for ’24 and ’25, respectively (20), along with 5-year annualized growth of 10.6%.
• Zacks projects YOY 0.9% contraction (’24) and 12.4% growth (’25) along with 5-year annualized growth of 10.4% (9).
• Value Line projects 11.7% annualized growth from ’23-’28.
• CFRA projects growth of 1.0% YOY and 7.2% per year for ’24 and ’23-’25 along with a 3-year CAGR of 13.0%.
• M* provides an annualized long-term ACE of 13.4%.

My 9.0% forecast is below the long-term-estimate range (mean of five: 11.3%). I will use ’23 EPS of $5.88/share as the initial value rather than 2024 Q1 EPS of $8.21 (annualized).

My Forecast High P/E is 35.0. Over the past decade, high P/E ranges from 63.6 in ’23 to 268 in ’14. Four of 10 years have triple-digit high P/Es. Excluding those, the last-5-year mean is 80.1 and the last-5-year-mean average P/E is 67.1. I am way below the range and at the top of my comfort zone.

My Forecast Low P/E is 24.0. Over the past decade, low P/E ranges from 24.9 in ’23 (30.3 in ’16 is the second-lowest) to 112 in ’14 with a last-5-year mean of 54.2. I am below the range.

My Low Stock Price Forecast (LSPF) of $141.10 is default based on $5.88/share initial value. This is 22.6% less than the previous close and 3.5% less than the 52-week low.

The stock pays a dividend for the first time in 2023 with a Payout Ratio (PR) of 19.1%. I will forecast zero for now.

These inputs land PAYC in the BUY zone with a U/D ratio of 3.3. Total Annualized Return (TAR) is 11.7%.

PAR (using Forecast Average—not High—P/E) is less than I seek for a medium-size company at 7.9%. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 167 studies done in the past 90 days (my study and 42 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and PR are 11.9%, 12.5%, 40.0, 25.0, and 15.2%, respectively. I am lower across the board. Value Line projects a future average annual P/E of 30.0 that is less than MS (32.5) and greater than mine (29.5).

MS high / low EPS are $11.42 / $5.90 versus my $9.05 / $5.88 (per share). My high EPS is less due to a lower growth rate. Value Line’s high EPS of $13.45 is greater than both.

MS LSPF of $146.40 implies a Forecast Low P/E of 24.8 versus the above-stated 25.0. MS LSPF is only 0.8% less than the default $5.90/share * 25.0 = $147.50. MS LSPF is 3.8% greater than mine, however.

TAR (over 15.0% preferred) is less than MS 15.2%. I believe MOS to be robust in the current study.

With regard to valuation, PEG is 2.3 per Zacks and my projected P/E: somewhat overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] is ridiculously cheap at 0.33.

Lots of things to like about this stock study: good analyst coverage, no long-term debt, outstanding ROE, “Exemplary” Capital Allocation and 4-star rating per M*, dirt-cheap relative value, “Strong Buy” per CFRA, and “wide recovery potential at a deeply discounted valuation” per Value Line.

PAYC is a BUY under $180/share. With a forecast high price ~$316, my personal TAR criterion would be met ~$158 (0% PR forecast decreases TAR by 0.5%).