Paycom software (PAYC) is one of the stocks most viewed by Zacks.com visitors recently. So it might be a good idea to review some of the factors that can affect the stock’s performance in the short term.
Over the past month, shares of this human resources and payroll software maker have returned -39%, compared to the Zacks S&P 500 Composite’s +1.7% change. During this period, the Zacks Internet – Software industry, into which Paycom falls, has lost 1.2%. The key question now is: What could the stock’s future direction be?
While media releases or rumors of a significant change in a company’s business outlook usually make its stock ‘trend’ and lead to an immediate price change, there are always some fundamental facts that ultimately dominate buy-and-hold decision-making.
Earnings estimate revisions
Here at Zacks, we prioritize assessing the change in the projection of a company’s future earnings above all else. This is because we believe that the present value of its future earnings is what determines the fair value of the stock.
We essentially look at how sell-side analysts covering the stock are revising their earnings estimates to reflect the impact of recent business trends. And if earnings estimates rise for a company, the fair value of its stock rises. A higher fair value than the current market price drives investors’ interest in buying the stock, leading the price to move higher. This is why empirical research shows a strong correlation between trends in earnings estimate revisions and short-term stock price movements.
For the current quarter, Paycom is expected to deliver earnings of $1.81 per share, indicating a change of +4.6% over the prior year quarter. The Zacks Consensus Estimate has changed -10.3% over the past 30 days.
The consensus earnings estimate of $7.65 for the current fiscal year indicates a year-over-year change of +24.6%. This estimate has changed -1.1% over the last 30 days.
For the next fiscal year, the consensus earnings estimate of $8.34 indicates a change of +9% from what Paycom is expected to report a year ago. Over the past month, the estimate has changed -10.1%.
With an impressive externally audited track record, our proprietary stock rating tool – Zacks Rank – is a more conclusive indicator of a stock’s near-term price performance as it effectively harnesses the power of earnings estimate revisions. The size of the recent change in the consensus estimate, along with three other factors related to earnings estimates, has resulted in a Zacks Rank #3 (Hold) for Paycom.
The chart below shows the evolution of the company’s forward 12-month consensus EPS estimate:
12 month EPS
Expected revenue growth
While a company’s earnings growth is arguably the best indicator of its financial health, not much is happening if it can’t grow its revenue. It is almost impossible for a company to increase its earnings without increasing its turnover for long periods. Therefore, knowing a company’s potential revenue growth is crucial.
For Paycom, the consensus sales estimate for the current quarter of $422.53 million indicates a year-over-year change of +14%. For the current and next fiscal years, estimates of $1.69 billion and $1.9 billion indicate +22.8% and +12.7% changes, respectively.
Last reported results and surprise story
Paycom reported revenue of $406.3 million in the last reported quarter, representing a year-over-year change of +21.6%. EPS of $1.77 for the same period compared to $1.27 a year ago.
Compared to the Zacks Consensus Estimate of $411.04 million, the reported revenue represents a -1.15% surprise. The EPS surprise was +9.26%.
The company beat consensus EPS estimates in each of the last four quarters. The company topped consensus earnings estimates three times during that period.
No investment decision can be effective without considering a stock’s valuation. Whether a share’s current price correctly reflects the intrinsic value of the underlying company and the company’s growth prospects is a significant determinant of its future price development.
While comparing the current values of a company’s valuation multiples, such as price-to-earnings (P/E), price-to-sales (P/S), and price-to-cash flow (P/CF), with its own historical values help determine whether its stock is fairly valued, overvalued or undervalued, comparing the company against its peers on these parameters gives a good sense of the reasonableness of the share price.
The Zacks Value Style Score (part of the Zacks Style Scores system), which pays close attention to both traditional and unconventional valuation metrics to grade stocks from A to F (an An is better than a B; a B is better than a C; and so on), is quite useful in identifying whether a stock is overvalued, correctly valued or temporarily undervalued.
Paycom is rated D on this front, indicating that it trades at a premium to its peers. Click here to see the values of some of the valuation metrics that have driven this grade.
The facts discussed here and much other information on Zacks.com can help determine whether paying attention to the market’s buzz about Paycom is worthwhile. However, its Zacks Rank #3 suggests it may perform in line with the broader market in the near term.
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