Why Has Park City Group Been an Underperformer?
- By Ishan Majumdar
A fundamental problem with the technology space, particularly SaaS-based business models, is that companies tend to trade at very high multiples due to the nature of the business. SaaS companies tend to have a majority of their clients through retainer agreements, implying a very stable revenue model with excellent growth potential. However, this fundamental strength has been over-accounted for, in the valuations of a number of tech stocks resulting in sky-high valuations.
Warning! GuruFocus has detected 2 Warning Signs with PCYG. Click here to check it out.
The intrinsic value of PCYG
Park City Group (PCYG) is a classic example of such a stock. The company, a software and cloud-based solutions provider to the food manufacturing and retail industries, continued to deliver good results in its most recent quarter. However, the question to be asked is, has the stock price lived up to the company's fundamental strength?
Park City Group is a classic example of a technology stock that has demonstrated profitable growth over the years but that has been a consistent underperformer in terms of its stock price. As shown in the three-year chart, the stock price has depreciated by 30% over the past three years, including the current year, against the Dow Jones Industrial Average, which has grown by 39%.
The company has demonstrated good profitability and a positive return on equity but has never paid dividends. The only possible explanation for this lack of price appreciation and poor performance is the fact that Park City Group has always been one of the highly overvalued tech stocks.
Good results with an increasingly customer-centric management
As mentioned earlier, the SaaS business model is known to have good revenue stability as long as a company can prevent the loss of its customers that are on retainer agreements. Park City Group is working on this aspect wonderfully, and management has already managed to reduce customer churn to below 2%. The team is also managing to cross-sell its services to customers, particularly its marketplace customers.
All this has resulted in an excellent quarterly result where Park City Group saw its revenues go up by 26% this quarter to about $5.9 million versus $4.7 million in the corresponding quarter of the previous year. There was visible growth in both the supply chain and the marketplace business of the company. Profitability improved further as the operating margin shot up to 17% and earnings per share quadrupled from 1 cent per share last year to 4 cents per share in this quarter. Overall, the company is showing visible growth in terms of top line and profitability.
Valuation was always a problem
There are hardly any flaws in terms of the financial fundamentals of Park City Group. The company has an operating margin of 17.71% and a net margin of 17.38% resulting in a return on equity of 8.91%. The three-year revenue growth rate has been as high as 11.4% and there has been some insider buying this year, while the stock was between $7 and $8. In fact, there has been some positive guru trading activity around the stock as well with Ken Fisher (Trades, Portfolio) entering the stock for the first time in end June and First Eagle Investment (Trades, Portfolio) continuing to average their investment price.
However, the valuation multiples for this stock are still not low enough to justify an investment at the current levels. The price-earnings ratio of Park City Group is as high as 47.52 and the price to operating cash flow is also unbelievable at 60.29. These have led to an EV-revenue multiple above 6. The problem is that the stock has consistently been trading at such high multiples. Even close peers like QAD Inc. (QAD) are trading at lower valuations. This is the reason the stock has a Business Predictability Rank of hardly 1 star with nominal returns to investors in the past.
Conclusion
While management continues to deliver good results and perform well in both the supply chain and the marketplace businesses, there are a sufficient number of reasons to avoid a stock like Park City Group. Its historical returns versus the index have been abysmal, and it continues to be overvalued versus its peers. Also, the stock has a very high beta of 1.8, which is not suitable for investors with a medium to low-risk appetite.
The increasing uncertainty surrounding the tech industry stocks is also a factor that should make investors circumspect about a stock like Park City Group. Overall, it is best to sit on the side and observe the company's performance and the stock price movement until it reaches a reasonable valuation.
Disclosure: No positions.
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This article first appeared on GuruFocus.
Warning! GuruFocus has detected 2 Warning Signs with PCYG. Click here to check it out.
The intrinsic value of PCYG
