On August 3, 2023, Ceridian HCM Holding (CDAY, Financial) saw a daily gain of 5.81% with its stock price reaching $70.9. Despite this positive movement, the company reported a Loss Per Share of $0.24. This raises the question: Is Ceridian HCM Holding (CDAY) a potential value trap? This article delves into the company's valuation, financial strength, and profitability to provide a comprehensive analysis. Read on to understand more about this intriguing stock.
Company Overview
Ceridian HCM Holding Inc (CDAY, Financial) is a leading provider of payroll and human capital management solutions, serving clients ranging from 100 to 100,000 employees. The company shifted its focus to cloud-based HCM services following the 2012 acquisition of Dayforce. As of fiscal 2022, about 80% of the group's revenue is derived from the flagship Dayforce platform, catering to enterprise clients. The remainder is evenly split between the Powerpay platform, targeting small businesses in Canada, and legacy Bureau products.
Despite its market cap of $11 billion and sales of $1.3 billion, the company's stock price of $70.9 stands in stark contrast to its GF Value of $138.2. This discrepancy triggers a closer examination of the company's value.
Understanding GF Value
The GF Value is a proprietary measure that reflects the intrinsic value of a stock. It is computed by considering historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line on our summary page provides an overview of the fair value at which the stock should ideally be traded.
According to GuruFocus Value calculation, Ceridian HCM Holding (CDAY, Financial) might be a potential value trap. With its current price of $70.9 per share and the market cap of $11 billion, the future return of Ceridian HCM Holding stock is likely to be poor if the price is significantly above the GF Value Line.
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Financial Strength Analysis
Assessing a company's financial strength is crucial to avoid high risks of permanent capital loss. Key indicators such as the cash-to-debt ratio and interest coverage can provide insights into its financial health. Ceridian HCM Holding has a cash-to-debt ratio of 0.34, ranking lower than 82.21% of companies in the Software industry. This suggests that the company's financial strength is poor, with a rating of 4 out of 10.
Profitability and Growth
Investing in profitable companies generally carries less risk. Ceridian HCM Holding's profitability has been fair, with the company having been profitable for 2 years over the past 10. However, with an operating margin of 2.38%, it ranks worse than 50.48% of companies in the Software industry.
The growth of a company is a crucial factor in its valuation. Ceridian HCM Holding's 3-year average annual revenue growth is 13.7%, ranking better than 62.98% of companies in the Software industry. However, its 3-year average EBITDA growth rate is -24.5%, which ranks worse than 84.77% of companies in the Software industry.
Comparing the company's return on invested capital (ROIC) to the weighted average cost of capital (WACC) can provide further insights into its profitability. For the past 12 months, Ceridian HCM Holding's ROIC is 1.28, and its cost of capital is 10.76.
Is Ceridian HCM Holding a Value Trap?
Despite signs of undervaluation, Ceridian HCM Holding's weak financial health and fair profitability suggest it might be a value trap. The company's Altman Z-score stands at 0.93, indicating an increased bankruptcy risk. A Z-score above 2.99 typically reflects a safer financial position. To understand more about the Z-score's role in assessing a company's financial risk, please click here.
Conclusion
In conclusion, Ceridian HCM Holding (CDAY, Financial) stock appears to be a potential value trap. The company's financial condition is poor, and its profitability is fair. Its growth ranks worse than 84.77% of companies in the Software industry. To learn more about Ceridian HCM Holding stock, you can check out its 30-Year Financials here.
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