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Is Paycom Software’s Growth Slowing?

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Stock (Symbol)

Paycom Software (PAYC)

Stock Price

$75

Sector
Technology
Data is as of
September 5, 2017
Expected to Report
Oct 30
Company Description
paycom_circlePaycom Software, Inc. is a provider of cloud-based HCM software solution that requires no customization and is -based on a core system of record maintained in a single database for all HCM functions. Talent acquisition includes applicant tracking, candidate tracker, background checks, on-boarding, e-verify & tax credit services. Time & labor management includes time and attendance, scheduling/schedule exchange, time-off requests, labor allocation & labor management reports/push reporting. Payroll includes payroll & tax management, Paycom pay, expense management and garnishment management. Talent management includes employee self-service, compensation budgeting, performance management, executive dashboard & Paycom learning. HR management includes document and task management, government and compliance, benefits, COBRA, personnel action forms, surveys and ACA dashboard. Source: Thomson Financial
Sharek’s Take
David SharekPaycom Software (PAYC) has been on a magnificent run this year, but I have to ask this question: Is growth slowing? Profits grew just 24% last qtr — the slowest growth since the company went public — and profit growth is expected to average just 22% the net 4 qtrs. Twenty percent growth is solid, but not when you’re carrying a 65 P/E. Paycom offers a complete cloud-based HR program for small and medium sizes businesses that human resource personnel can log into online to process payroll and benefits for employees. This software makes it easy to do talent acquisition and background checks, to payroll and time-off requests, as well compliance tasks such as government registrations, benefits administration, COBRA and retirement. It even figures out the Affordable Care Act. PAYC has a nice expansion model, where it enters new cities with an experienced sales rep that becomes a manager, makes job applicants prove themselves by setting up two appointments before hiring them, and then has them set out on an organized plan to get appointments and sales. Businesses then utilize their own employees to “learn the system”. The company also boasts a 91% client retention rate. PAYC had $55 million in free-cash flow last year and recently initiated a $50 million stock buyback program on top of the $50 million one it had in 2016. Overall this continues to be one of the top stocks on the market, but the valuation is high if growth does slow — as is expected.
One Year Chart
 What concerns me is Estimates for the next 4 qtrs are 27%28%, 17% and 15% profit growth the next 4 qtrs. Could that mean slower growth ahead? Also, the Est. LTG fell from 49% per year to 28% in my last report and is 27% now. But PAYC has beaten the street by 6 cents in each of the last 3 qtrs and if it does do the next 2 qtrs that would mean 67% and 61% growth. So no, I don’t think growth is slowing.
Fair Value
PAYC had a 55 P/E 3QtrsAgo, a 65 P/E last qtr and a 65 P/E this qtr. With the stock up from $40 to 75 without a real correction, I feel it could simmer down some. So I’m taking my Fair Value P/E from 65 to 60.
Bottom Line
Paycom Software has an amazing business model and a super stock. But is growth going to slow? I don’t think it will in 2017, but perhaps in early 2018. At this point it’s too early to tell. In this ten-year view the stock looks parabolic and in need of a rest. I like Paycom a lot. What’s nice is this company focuses on the smaller businesses, and isn’t in a fight with bigger players that are vying for large accounts. PAYC ranks 20th of 33 stocks in the Growth Portfolio Power Rankings.
Power Rankings
Growth Stock Portfolio

20 of 33

Aggressive Growth Portfolio

N/A

Conservative Stock Portfolio

N/A

tags:
David Sharek David Sharek is stock portfolio manager and CEO of DavidSharek.com. David believes a company's profits ultimately drive the price of its stock. His book The School of Hard Stocks can be found on Amazon.com.