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Reasons to Hold Ultimate Software in Your Portfolio for Now

Zacks Equity Research

The Ultimate Software Group, Inc. ULTI continues to benefit from robust adoption of its HCM solutions and synergies from PeopleDoc. In the last reported quarter, the companydelivered a positive earnings surprise of 0.8%, with average beat of 11.2%. It has a long-term expected EPS growth rate of 21.3%.

Let’s delve deeper and analyze the factors driving Ultimate Software’s performance.

Key Catalysts

Ultimate Software delivered third-quarter 2018 non-GAAP earnings of $1.33 per share, surpassing the Zacks Consensus Estimate by a penny. Moreover, the figure surged 27.9% from the year-ago quarter figure of $1.04.

Revenues increased 21.9% from the year-ago quarter to $287.8 million, almost in line with the Zacks Consensus Estimate of $287 million. The figure also came within the higher end of management’s projected range of $286 to $288 million.

As anticipated, PeopleDoc is aiding the company to bolster presence across Europe. The top line benefited from new strategic customer wins. Further, management is elated on the recognition of its HCM Suite by the likes of Gartner, Nucleus Research, to mention a few. Growing clout of company’s AI platform, Xander is noteworthy. Further, robust traction of UltiPro solutions including UltiPro Workforce Management and UltiPro Benefits Prime is a tailwind.

Ultimate Software’s strategic partnership with Deloitte Canada deserves a special mention. The alliance is aimed at providing UltiPro HCM suite throughout North America via Deloitte’s consultancy and technology service abilities. With the tie-up, Ultimate Software’s products and services offering complementary solutions are anticipated to have a broader market.

Moreover, the company is firing on all cylinders to fortify presence in the HRM market. In fact, the new innovation is anticipated to aid the company in strengthening foothold in the human capital management (“HCM”) market.

Per research firm MarketsandMarkets, the HCM market size is anticipated to grow from $14.5 billion in 2017 to $22.5 billion by 2022 at a CAGR of 9.2%.

We believe that the augmentation of UltiPro’s features will not only improve customer retention rate but also attract new customers on a regular basis. This will eventually boost recurring revenue growth. Management anticipates recurring revenues to increase 24% year over year in fiscal 2018.

For fourth-quarter 2018, total revenues are projected to come in around $300 million. The Zacks Consensus Estimate for revenues is pegged at $300.6 million, representing growth of 19.6% year over year.

The company’s Zacks Consensus Estimate for current quarter earnings of $1.44 reflects year-over-year growth of 29.7%. Moreover, earnings are expected to register an improvement of 40.4% in fiscal 2018.

The Ultimate Software Group, Inc. Price

 

The Ultimate Software Group, Inc. Price | The Ultimate Software Group, Inc. Quote

Valuation Looks Rational

From a valuation perspective, the stock looks attractive as it currently trades significantly lower than the industry average based on a forward earnings estimate. This signifies huge upward potential. Ultimate Software currently trades at a forward P/E of 45.43x compared with the industry group average of 47.1x.

Risks Persist

However, intensifying competition in the HCM market could lead to pricing pressure and affect Ultimate Software’s margins in the near term. Further, higher operating expenses primarily owing to an increase in headcount and marketing spending is a major concern.

Our Take

We expect the aforementioned factors to help the company sustain strong momentum and stay afloat amid difficult times. Consequently, we suggest that investors hold on to the stock for the time being.

Zacks Rank & Stocks to Consider

Currently, Ultimate Software has a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector are Upland Software UPLD, Marvell Technology Group Ltd. MRVL and Infineon Technologies AG IFNNY, all flaunting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Upland Software, Marvell and Infineon Technologies is currently pegged at 20%, 9.4% and 8.6%, respectively.

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