Paycom Software Inc (PAYC, Financial) experienced a significant daily loss of 37.27%, with a three-month loss of 33.48%. Despite this, the company's Earnings Per Share (EPS) stands at 5.45. This raises the question: is Paycom Software (PAYC) significantly undervalued? To answer this, we'll delve into a comprehensive valuation analysis.
Company Overview
Established in 1998, Paycom Software Inc (PAYC, Financial) is a fast-growing provider of payroll and human capital management (HCM) software. The company primarily targets clients with 50-10,000 employees in the United States. As of 2022, Paycom Software services about 19,000 clients. Alongside its core payroll software, Paycom Software offers various HCM add-on modules, including time and attendance, talent management, and benefits administration.
With a current stock price of $153.67 and a market cap of $8.90 billion, Paycom Software's value seems significantly undervalued when compared to the GF Value of $552.34. This discrepancy is intriguing and warrants a deeper examination of the company's valuation.
Understanding the GF Value
The GF Value is a proprietary measure that provides an estimate of a stock's intrinsic value. It is calculated based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. The GF Value Line on the summary page provides an overview of the fair value at which the stock should ideally be traded.
According to GuruFocus Value calculation, Paycom Software (PAYC, Financial) is significantly undervalued. Given that the stock is trading significantly below the GF Value Line, its future return is likely to be higher. As such, the long-term return of Paycom Software's stock is likely to be much higher than its business growth.
Financial Strength
Investing in companies with strong financial strength reduces the risk of permanent capital loss. A great starting point for understanding a company's financial strength is examining its cash-to-debt ratio and interest coverage. Paycom Software has a cash-to-debt ratio of 18.5, better than 71.41% of 2739 companies in the Software industry. GuruFocus ranks Paycom Software's overall financial strength at 9 out of 10, indicating strong financial health.
Profitability and Growth
Investing in profitable companies carries less risk. Companies with high profit margins typically offer better performance potential. Paycom Software has been profitable for 10 years over the past decade. The company had revenues of $1.60 billion and Earnings Per Share (EPS) of $5.45 in the past 12 months. Its operating margin of 27.47% is better than 93.89% of 2767 companies in the Software industry. GuruFocus ranks Paycom Software's profitability as strong.
One of the most important factors in a company's valuation is growth. Companies that grow faster create more value for shareholders. Paycom Software's average annual revenue growth is 23.2%, ranking better than 77.97% of 2397 companies in the Software industry. Its 3-year average EBITDA growth is 21.8%, ranking better than 69.54% of 1993 companies in the Software industry.
ROIC vs WACC
Another way to evaluate a company's profitability 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 WACC is 12.
Conclusion
In summary, Paycom Software (PAYC, Financial) appears to be significantly undervalued. The company's strong financial condition, impressive profitability, and robust growth make it a compelling investment. To learn more about Paycom Software's stock, you can check out its 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
