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Paycom Trading At Full Valuation, Stifel Says In Downgrade

Shanthi Rexaline

Paycom Software Inc (NYSE: PAYC) — despite being a leader in mid-market human capital management software and benefiting from high growth and profitability — lost Stifel's top-notch rating this week. 

The Analyst

Stifel analyst Brad Reback downgraded shares of Paycom from Buy to Hold and upped the price target from $90 to $100.

The Thesis

Paycom shares have risen 38 percent year-to-date versus a 3.8-percent gain for the Nasdaq, while in 2017 the company's shares returned 77 percent, Reback said in a Thursday note.

Paycom has limited penetration of a large market opportunity, with a number of drivers such as new sales offices, improving sales productivity, up- and cross-selling and bolt-on solutions, the analyst said. These factors are likely to drive double-digit top-line growth and strong profitability in the coming years, according to Stifel. 

The decision to slow new office openings in 2017, though the right long-term move, could limit revenue upside in 2019, Reback said. Stifel's calendar 2019 revenue estimate is modestly below the consensus.

Paycom's decision to adopt a longer amortization timeframe for sales commissions will improve its adjusted EBITDA multiple by about two to three turns, Reback said. 

Though the premium valuation of Paycom relative to The Ultimate Software Group, Inc. (NASDAQ: ULTI) and Paylocity Holding Corp (NASDAQ: PCTY) is justified, Stifel said the shares are unlikely to outperform over the next 12 months.

The Price Action

Paycom shares were retreating 1.28 percent to $109.48 at the time of publication Friday. 

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Photo courtesy of Paycom. 

Latest Ratings for PAYC

Date Firm Action From To
Mar 2018 Stifel Nicolaus Downgrades Buy Hold
Mar 2018 KeyBanc Maintains Overweight Overweight
Feb 2018 KeyBanc Upgrades Sector Weight Overweight

View More Analyst Ratings for PAYC
View the Latest Analyst Ratings

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