PCTY Stock Study (9-5-24)

Posted by Mark on October 28, 2024 at 06:49 | Last modified: September 5, 2024 11:38

I recently did a stock study on Paylocity Holding Corp. (PCTY) with a closing price of $160.51.

M* writes:

     > Paylocity is a provider of payroll and human capital
     > management, or HCM, solutions servicing small- to midsize
     > clients in the United States. The company was founded in
     > 1997 and targets businesses with 10 to 5,000 employees and
     > services about 39,000 clients as of fiscal 2024. Alongside
     > core payroll services, Paylocity offers HCM solutions such
     > as time and attendance and recruiting software, as well
     > workplace collaboration and communication tools.

Since 2018 (’15-’17 excluded from full analysis due to respective EPS of -$0.28/share, -$0.08/share, and $0.12/share that would otherwise inflate historical growth rate), this medium-size company grows sales and earnings at annualized rates of 24.8% and 29.1%, respectively. Lines are up, straight, and parallel with no historical data audit flags. Interestingly, Value Line only gives an Earnings Predictability score of 45.

Since 2018 (FY ends 6/31), PTPM leads peer and industry averages by climbing from 4.4% to 19.8% (’24) with a last-5-year mean of 12.8%. ROE leads peer and industry averages while ranging from 15.1% in ’21 to 18.3% in ’24 with a last-5-year mean of 16.8%. Debt-to-Capital is much lower than peer and industry averages despite increasing from 1.0% (’18) to 5.0% (’24) with a last-5-year mean of 13.8%.

Current and Quick Ratios are 1.13 and 0.13, respectively, per M* who assigns an “Exemplary” rating for Capital Allocation and “Narrow” Economic Moat. The difference surprises me for what should be an asset-light company. While 0.13 would be alarmingly low, Value Line gives an A grade for Financial Strength. As a check on M*, gurufocus.com reports 1.13 for both June ’24 current and quick ratios.

With regard to sales growth:

• YF projects YOY 8.5% and 10.2% for ’25 and ’26, respectively (based on 17 analysts).
• Zacks projects YOY 8.4% and 9.3% for ’25 and ’26, respectively (7 analysts).
• Value Line projects 11.2% annualized growth from ’23-’28.
• CFRA provides ACE of 8.5% YOY and 9.6% per year for ’25 and ’24-’26, respectively (18).
• M* offers a 2-year annualized ACE of 11.1% and its own 5-year estimate of 13.0%.

My 8.0% annualized forecast is below the range.

With regard to EPS growth:

• MarketWatch projects 4.8% and 9.8% per year for ’24-’26 and ’24-’27, respectively (based on 21 analysts).
• Nasdaq.com projects 12.2% YOY and 9.9% per year for ’26 and ’25-’27, respectively (7/7/2 analysts for ’25/’26/’27).
• Seeking Alpha projects 4-year annualized growth of 9.2%.
• YF projects YOY 1.7% contraction and 9.1% growth for ’25 and ’26 along with 5-year annualized growth of 16.8% (18).
• Zacks projects YOY 3.5% contraction and 9.1% growth for ’25 and ’26 along with 5-year annualized growth of 9.2% (8).
• Value Line projects 17.6% annualized growth from ’23-’28.
• CFRA provides ACE of 76.9% YOY growth and 38.6% growth per year for ’25 and ’24-’26, respectively (17).
• M* projects long-term growth of 20.0% per year.

I cannot explain the discontinuity between CFRA’s ’24 and ’25/’26 ACE. No recent/ongoing acquisitions are mentioned.

My 9.0%/year forecast is below the long-term-estimate range (mean of five: 14.6%). Initial value is 2024 EPS of $3.63/share.

My Forecast High P/E is 44.0. Since 2018, high P/E ranges from 63.5 in ’24 to 195 in ’22 with a last-5-year mean of 135 and a last-5-year-mean average P/E of 103. Most of these numbers are high enough for me to regard as NMF. I am just below the current P/E of 44.1.

My Forecast Low P/E is 32.0. Since 2018, low P/E ranges from 36.1 in ’24 to 94.4 in ’22 with a last-5-year mean of 70.4. Again, most of these numbers are high enough for me to regard as NMF. I am forecasting below the range and near the top of my comfort zone.

My Low Stock Price Forecast (LSPF) of $116.20 is default based on initial value given above. This is 27.6% less than the previous close and 10.5% less than the 52-week low.

These inputs land PCTY in the HOLD zone with a U/D ratio of 1.9. Total Annualized Return (TAR) is 8.5%.

PAR (using Forecast Average—not High—P/E) is less than I seek for a medium-size company at 5.8%. If a healthy margin of safety (MOS) anchors the study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 54 studies (my study and 21 outliers excluded) over the past 90 days, averages (lesser of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 13.3%, 13.9%, 46.0, and 33.7, respectively. I am lower across the board. Value Line [strangely] offers no future average annual P/E.

MS high / low EPS are $6.66 / $3.44 versus my $5.59 / $3.63 (per share). My high EPS is less due to a lower growth rate. Value Line’s $5.60 is less than both [would be somewhat shocking except the latter is ’28 while we are projecting to ’29].

MS LSPF of $118.20 implies Forecast Low P/E of 34.4: greater than the above-stated 33.7. MS LSPF is 2.0% greater than the default $3.44/share * 33.7 = $115.93 resulting in more aggressive zoning. MS LSPF is also 1.7% greater than mine.

With regard to valuation, PEG is 2.8 and 4.5 per Zacks and my projected P/E, respectively: both overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] is slightly low at 0.89 when I use the lowest low/high P/E’s of the last 5 years to calculate the denominator (anything else is NMF and results in the metric being [deceptively] lower).

MOS is robust because my inputs are near or below respective analyst/historical ranges and MS averages. This is further supported by an MS TAR (17.5%) that is 900 basis points greater than mine.

Per U/D, PCTY is a BUY < $148. BI TAR criterion is met at $123/share based on forecast high price of $246 (no dividend).

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