Paycom May Look Expensive But You Should Buy it Anyway

Earnings Will Continue to Propel Paycom Stock Higher 

There are many reasons that investors could look at Paycom (NYSE: PAYC) and think it’s better to stay away. PAYC stock is up 21% for the year which closely approximates the 24% gain in the S&P 500. However, the stock is up nearly 162% since the onset of the pandemic as compared to 82% for the S&P 500. And with the stock up nearly 10% in the month prior to earnings, it could be a signal that all of the growth is priced in. 

There’s two reasons why I believe that is unlikely to be the case. First, I believe the company will deliver a strong earnings report. And second, I believe that it will continue to affirm its current guidance. Both of those will be bullish signals for PAYC stock.  

Expecting Strong Earnings 

Paycom will report earnings after the market closes on November 2. At this time, analysts expect the company to post earnings per share of 90 cents on revenue of $250.07 million. And the whisper number says PAYC will beat on the bottom line and deliver EPS of 95 cents.

One reason for Paycom’s track record of strong earnings is due to its retention rate. In the company’s last quarter, that was over 90%.

Watch For Guidance

In and of itself that doesn’t mean much. The company has a healthy habit of beating earnings expectations. However, investors like to see a confirmation that a company is delivering on its guidance. If Paycom simply meets expectations, it will deliver a number that’s 30% higher on a year-over-year (YOY) basis. Better still, its earnings for the first three quarters of FY2021 will be $3.34 which puts the company well on track to meet its projection of $4.40.

And in its previous earnings report, Paycom guided to an annual EPS in 2023 that will increase to $7.33. That would be a 66% growth from this year’s projected earnings. And that’s if the company doesn’t increase its guidance. When looked at through this prism, and considering its status as a high-growth company, PAYC stock could justify an earnings multiple of 90. In that case, the stock would have a fair value of approximately $660.

At least one analyst agrees. The company received a bullish price target increase from Deutsche Bank which initiated coverage with a price target of $650.

What Could Hold PAYC Stock Back?

In a word, jobs. On November 5, the market will get its next read on employment in the monthly jobs report. The last two months have showed the country adding 560,000 jobs. That is a slowdown from the gain of over two million jobs added in June and July. September was particularly weak with just 194,000 jobs added. However, as I noted above, PAYC stock has largely shrugged off those losses.

Economists are confident that job growth will continue. But they’re less confident that this will be as strong as investors may like. They point to lingering supply chain concerns, labor shortages, and inflation as among the reasons why job growth may not be as robust as expected.

Nevertheless, if you believe the jobs number may disappoint, you may be better off waiting to see what the report says before you decide to buy.

Buy PAYC Stock Because of the Law of Attraction

Employees have never been more emboldened. And that works in the favor of Paycom and its technology. One thing that employees are craving is more control over basic HR functions. Paycom’s ability to offer self-service capabilities will continue to appeal to businesses who are looking for any lever they can pull to attract the best employees.

Plus, the company provides a dedicated team for small businesses and direct sales representatives for large companies. This helps ensure that every company gets a solution customized to their needs.