The company posted strong third-quarter profits.
Shares of Paycom software (PAYC 0.39%) rose 25.5% in October, according to data from S&P Global Market Intelligence. The web-based HR and payroll management provider accelerated revenue growth in the third quarter as it continues to automate workloads for back-office functions. After collapsing earlier this summer, Paycom shares have risen more than 45% in recent months as investors get excited about the long-term software winner again.
This is why Paycom Software shares rebounded this month.
Sales growth is recovering
On October 30 – towards the end of the month – Paycom reported earnings for the third quarter of 2024. Revenue grew 11.2% year over year to $451.9 million, while net profit for the period was flat at $73.3 million. This was an acceleration in revenue growth from last quarter, when revenue growth slowed to just 9% year over year.
Many investors feared a major drop in revenue for Paycom Software. Historically, the company’s revenue has grown at healthy double digits, with growth of around 30% just a few years ago. This quarter saw the first reversal of this slowdown, which investors saw as a positive sign.
Management says the company is doing well with its cloud-based automation software that saves a lot of time for corporate payroll and HR staff. It also now pays a quarterly dividend that yields almost 1% and is buying back shares as another way to return money to shareholders. As a profitable company, Paycom’s cash flow has grown consistently in recent years, reaching more than $300 million in the last twelve months.
What should investors do now?
Paycom’s business is recovering and that’s why its shares are soaring to new heights. However, now it is trading at a more expensive earnings multiple. Compared to the current market cap of $12.3 billion, shares trade at a price-to-free cash flow (P/FCF) of 41. That’s significantly higher than the average for the S&P500showing that investors have moved from pessimistic to optimistic about Paycom stock.
This doesn’t necessarily mean that investors should sell their shares today. Over the past five years, Paycom’s free cash flow has grown by a total of 132%, and revenues have grown by a total of 147%. If this growth continues, Paycom’s free cash flow will fall and its shares will likely rise. Don’t sell this until long-term sales and free cash flow continue to rise.
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Paycom Software. The Motley Fool has a disclosure policy.
