Paycom Software Inc (PAYC, Financial) has recently seen a daily loss of -3.04%, and a 3-month loss of -16.68%. Despite these losses, the company boasts an Earnings Per Share (EPS) (EPS) of 5.45. This raises a critical question: Is Paycom Software's stock significantly undervalued? This article aims to explore this question in depth, providing a comprehensive valuation analysis. Let's delve into the financial intricacies of Paycom Software.
About Paycom Software Inc (PAYC, Financial)
Established in 1998, Paycom Software is a rapidly growing provider of payroll and human capital management (HCM) software. The company primarily serves clients with 50-10,000 employees across the United States. As of 2022, Paycom Software services roughly 19,000 clients, grouped under its parent company. Alongside its core payroll software, Paycom Software offers various HCM add-on modules, including time and attendance, talent management, and benefits administration.
The company's stock currently trades at $268.48 per share, with a market cap of $15.60 billion. However, the GF Value, an estimation of fair value, stands at $540.18. This discrepancy suggests that Paycom Software's stock might be significantly undervalued.
The GF Value of Paycom Software
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. The GF Value Line on our summary page provides an overview of the fair value at which the stock should ideally be traded. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) at which the stock has traded.
- The GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of business performance.
The GF Value suggests that Paycom Software is significantly undervalued. Given this, the long-term return of its stock is likely to be much higher than its business growth.
Financial Strength of Paycom Software
Investing in companies with poor financial strength can lead to a high risk of permanent capital loss. To avoid this, investors must review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are key indicators of its financial strength. Paycom Software boasts a cash-to-debt ratio of 18.5, ranking better than 71.83% of 2755 companies in the Software industry. The overall financial strength of Paycom Software is 8 out of 10, indicating strong financial health.
Profitability and Growth of Paycom Software
Investing in profitable companies generally carries less risk. This is especially true for companies that have demonstrated consistent profitability over the long term. Paycom Software has been profitable for 10 years over the past decade. Over the past 12 months, the company had revenues of $1.60 billion and Earnings Per Share (EPS) of $5.45. Its operating margin of 27.47% is better than 94% of 2752 companies in the Software industry. Overall, GuruFocus ranks Paycom Software's profitability as strong.
One of the most important factors in the valuation of a company is its growth. Companies that grow faster create more value for shareholders, especially if that growth is profitable. Paycom Software's average annual revenue growth is 23.2%, ranking better than 78.45% of 2413 companies in the Software industry. The 3-year average EBITDA growth is 21.8%, which ranks better than 69.8% of 2010 companies in the Software industry.
ROIC vs WACC of Paycom Software
Another way to evaluate the profitability of a company is to compare its return on invested capital (ROIC) and the weighted cost of capital (WACC). ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. For the past 12 months, Paycom Software's ROIC is 8.58, and its cost of capital is 11.48.
Conclusion
Overall, Paycom Software (PAYC, Financial) stock appears to be significantly undervalued. The company's financial condition is strong, and its profitability is robust. Its growth ranks better than 69.8% of 2010 companies in the Software industry. To learn more about Paycom Software stock, you can check out its 30-Year Financials here.
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