Pick Paycom Stock To Play Travel Demand Recovery?

The shares of Paycom Software (NYSE: PAYC) have lost 16% since the beginning of this year despite ongoing vaccination allaying travel fears and pushing the hospitality sector higher. Per recent earnings, the company’s management has guided for a 20% revenue growth in 2021 – fairly in-line with the trajectory observed in the past few years. Paycom sells human capital management software to organizations and generates a bulk of its revenues from payroll processing. The U.S. economy has been observing improvement in employment statistics since the massive dip observed last February. Moreover, Trefis believes that rising economic activity will benefit employment services businesses as the labor participation rate improves and furloughed employees return to work. We highlight the historical trends in revenues, earnings, and stock prices in an interactive dashboard analysis on Buy Or Fear Paycom Software Stock?

Paycom’s revenues have grown at an average rate of 25% per year from $433 million in 2017 to $841 million in 2020, driven by the acquisition of new clients and expansion of its product offerings from traditional HCM to integrated cloud-based solutions. Notably, the company’s client base increased by 55% from 20,000 in 2017 to 31,000 in 2020.

Consistent with high revenue growth, net income also surged by 16% from $123 million in 2017 to $143 million in 2020 – leading to a sizable gain in the stock’s P/S multiple. While the current P/S multiple of 25 is much higher than prior years – 18 in 2019 and 9.5 in 2018 – we believe that PAYC stock has a sizable upside as its top line is expanding at a much higher rate than the market leader ADP. Our earlier analysis on ADP vs. Paycom: Is ADP Stock Appropriately Valued Given Its lower P/S Multiple Compared to Paycom? highlights the important factors.

Broader Market Outlook

In the recent release, the Bureau of Labor Statistics reported that 379,000 jobs were added in February 2021. Comparing to prior year statistics (before the pandemic), there are 9.5 million fewer jobs in the U.S. economy with hospitality, education, and public sectors affected the most. Notably, there are 3.5 million, 1.3 million, 1.4 million job losses in the hospitality, education, and public sectors, respectively – accounting for 65% of the total unemployment figures. Congress passed a $1.9 trillion relief and recovery package to augment job growth, but we believe that ongoing vaccination can result in a quicker than anticipated recovery in the hospitality industry. Per the vaccine tracker by Bloomberg, it will take 6 months to vaccinate 75% of the U.S. population with two-dose variants. Interestingly, the shares of Southwest Airlines (NYSE: LUV) and JetBlue Airways (NASDAQ: JBLU) have completely recovered to pre-Covid levels supported by TSA checkpoint figures.

The coronavirus pandemic has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Microsoft vs. Vertex Pharmaceuticals shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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