Paycom software (PAYC) is one of the most watched stocks by Zacks.com visitors lately. So it might be a good idea to take a look at some factors that could impact the stock’s short-term performance.
Shares of this HR and payroll software maker are up -3% over the past month, compared to a +5.1% rise in the Zacks S&P 500 composite. The Zacks Internet Software industry, which includes Paycom, is up 15.5% in the period. The most important question now is: where could the stock go in the short term?
Although media reports or rumors about a significant change in a company’s business prospects usually cause stock prices to rise and lead to an immediate price change, there are always certain fundamental factors that ultimately influence the buy-and-hold decision determine.
Earnings estimate revisions
Here at Zacks, we prioritize assessing the change in a company’s future earnings projection above everything else. That’s because we believe that the present value of the future income stream determines the fair value of the stock.
Our analysis is based primarily on how sell-side analysts who cover the stock revise their earnings estimates to take into account the latest business trends. When earnings expectations for a company rise, the fair value of its shares also rises. And when the fair value of a stock is higher than the current market price, investors tend to buy the stock, causing the price to rise. For this reason, empirical studies indicate a strong correlation between earnings estimate revision trends and near-term stock price movements.
Paycom is expected to post earnings of $2.45 per share for the current quarter, which represents a year-over-year change of -0.4%. Over the past 30 days, the Zacks Consensus Estimate has changed 3.2%.
The consensus earnings estimate of $7.73 for the current fiscal year indicates a year-over-year change of -0.3%. This estimate has changed by 5.4% over the past 30 days.
For the next fiscal year, the consensus forecast of $8.76 indicates a change of +13.4% from what Paycom is expected to report a year ago. Over the past month, the estimate has changed by 5.3%.
With an impressive outside-audited track record, our proprietary stock rating tool – the Zacks Rank – is a more compelling indicator of a stock’s near-term price movement because it effectively harnesses the power of earnings estimate revisions. The magnitude of the recent consensus estimate change, along with three other factors related to earnings estimates, has resulted in a Zacks Rank #5 (Strong Sell) for Paycom.
The chart below shows the evolution of the company’s forward twelve-month consensus EPS estimate:
12 month EPS
Expected sales growth
While a company’s earnings growth may be the best indicator of its financial health, not much will happen if it can’t grow its revenue. It is almost impossible for a company to grow its profits without growing its sales over long periods of time. That’s why it’s crucial to know a company’s potential revenue growth.
In Paycom’s case, the consensus revenue estimate of $496.37 million for the current quarter indicates a year-over-year change of +9.9%. The estimates of $1.87 billion and $2.1 billion for the current and next budget years indicate changes of +10.6% and +12.2%, respectively.
Last reported results and surprise history
Paycom reported revenue of $434.6 million in the last reported quarter, representing a year-over-year change of +17.3%. Earnings per share of $1.93 for the same period, compared to $1.73 a year ago.
Compared to the Zacks Consensus Estimate of $422.59 million, reported revenues represent a surprise of +2.84%. The EPS surprise was +8.43%.
The company beat consensus EPS estimates in each of the trailing four quarters. The company exceeded consensus revenue expectations three times during this period.
No investment decision can be efficient without taking into account the valuation of a stock. Whether a stock’s current price accurately reflects the intrinsic value of the underlying company and the company’s growth prospects is a key determinant of its future price performance.
Comparing the current value of a company’s valuation multiples, such as price-to-earnings ratio (P/E), price-to-sales (P/S), and price-to-cash flow (P/CF), with its own historical values helps determine whether the stock is fairly valued, overvalued or undervalued, while comparing the company to its peers based on these parameters gives a good idea of how fair the stock price is.
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, rightly valued, or temporarily undervalued.
Paycom is rated F in this area, indicating that it trades at a premium to its peers. Click here to view the values of some of the valuation data that led to this figure.
The facts discussed here and much other information found on Zacks.com can help determine whether or not it is worth paying attention to the market buzz about Paycom. However, its Zacks Rank #5 suggests it may underperform the broader market in the near term.
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