Paycom Software, Inc. (PAYC) will report its fiscal 2024 third-quarter earnings later this month, on October 30. In this piece, we will determine whether Paycom is a buy or a sell ahead of its earnings release.

With a market cap of $9.39 billion, PAYC provides cloud-based human capital management (HCM) solutions tailored for small to mid-sized businesses across the U.S. Its all-in-one platform integrates payroll, HR, and talent management functions, helping companies manage their workforce more efficiently, from hiring to retirement.

While Paycom’s revenue growth slowed to high single digits by the end of the first half of 2024, it aligns closely with its projected 10% growth target. Moreover, the company’s revenue is expected to grow, thanks to the demand for innovative tools like Beti and GONE, which streamline operations by reducing non-productive hours and boosting client efficiency.

For the third quarter, analysts expect the company’s revenue to increase 10.1% year-over-year to $447.18 million. However, its earnings per share is forecasted to sit at $1.62, down 8.5% from the prior-year period. Nevertheless, the company has an impressive earnings history, having beaten the consensus EPS estimates in each of the trailing four quarters.

In the last reported quarter, PAYC exceeded the consensus revenue estimate by $1.15 million, while its adjusted EPS of $1.62 came in slightly above the forecasted $1.60. Given this performance, the upcoming earnings report has the potential for another beat.

Over the past three months, shares of PAYC have gained 1.6%, though they are still down 20.9% year-to-date, closing the latest trading session at $163.57

Here are the financial aspects of PAYC that could influence its price performance in the near term:

Solid Financials

For the second quarter, which ended June 30, 2024, PAYC’s total revenue increased 9.1% year-over-year to $437.51 million. Its adjusted gross profit grew 6.1% over the prior-year period to $357.79 million. The company’s operating income stood at $95.14 million, up 9% year-over-year.

In addition, its net income came in at $67.97 million and $1.20 per share, representing an increase of 5.4% and 8.1%, respectively, from the same period last year. Also, its cash, cash equivalents, restricted cash, and restricted cash equivalents at the end of the period rose 11.6% from the prior-year period to $2.61 billion.

Favorable Annual Analyst Estimates

Street expects PAYC’s EPS for the current year (ending December 2024) to increase marginally from the year-ago value to $7.78, while its revenue estimate of $1.87 billion reflects a growth of 10.3% year-over-year.

Moreover, for the fiscal year ending December 2025, PAYC’s revenue is expected to increase 10.9% year-over-year to $2.07 billion. The company is estimated to post an earnings per share of $8.82 in the next year, indicating a 13.4% improvement from the prior year.

Discounted Valuation

In terms of forward P/E, PAYC is currently trading at 19.88x, 13.8% lower than the industry average of 23.05x. Likewise, its forward EV/EBIT multiple of 15.29 is 10.2% lower than the industry average of 17.02x.

In addition, the stock’s trailing-12-month EV/EBITDA of 13.65x is marginally below the 13.86x industry average. Also, its trailing-12-month PEG multiple of 0.39 compares to the industry average of 1.11.

Robust Profitability

PAYC’s 86.10% trailing-12-month gross profit margin is 172.2% higher than the 31.64% industry average. The stock’s 16.72% trailing-12-month levered FCF margin is 154.9% higher than the 6.56% industry average.

Similarly, its trailing-12-month EBIT and net income margins of 32.87% and 26.55% are relatively higher than their respective industry averages of 10.06% and 6.16%. Furthermore, PAYC’s trailing-12-month ROCE of 33.33% compares favorably to the industry average of 12.93%.

POWR Ratings Exhibit Mixed Prospects

PAYC’s stance is apparent in its POWR Ratings. The stock has an overall rating of C, which translates to Neutral in our proprietary rating system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. PAYC’s B grade for Value and Quality is justified by its lower-than-industry valuation and robust profitability, respectively.

Moreover, the stock is trading above its 100-day moving average of $157.55 but below its 200-day moving average of $173.42, justifying its C grade for Momentum.

PAYC is ranked #49 out of 131 stocks in the Software – Application industry. Click here to access PAYC’s Growth, Stability, and Sentiment ratings.

Bottom Line

While there’s optimism about Paycom’s potential to capitalize on continued demand for its solutions, the company’s focus on AI and innovation to enhance the client experience may impact its margins in the near term. In the first half of 2024, topline growth moderated, and higher expenses led to margin contraction. Although revenue is expected to grow, margins will likely remain under pressure.

If top line growth continues to slow, it could further weigh on profitability, potentially leading to bottom-line contraction and a weaker valuation, which could hurt the stock’s performance. Given PAYC’s high volatility, with a five-year beta of 1.18, the stock’s price movements tend to be more pronounced than the broader market. This volatility could create future buying opportunities if the price dips lower. Thus, it could be wise for investors to monitor the stock closely in the coming months.

How Does Paycom Software, Inc. (PAYC) Stack Up Against Its Peers?

While PAYC has an overall grade of C, equating to a Neutral rating, you may check out these A (Strong Buy) rated stocks within the Software – Application industry: IBEX Limited (IBEX), SS&C Technologies Holdings, Inc. (SSNC), and TeamViewer SE (TMVWY). To explore more Software – Application stocks, click here.

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PAYC shares were unchanged in premarket trading Thursday. Year-to-date, PAYC has declined -20.36%, versus a 23.66% rise in the benchmark S&P 500 index during the same period.

About the Author: Shweta Kumari

Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions. More...

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