PAYC Downgraded

Per StreetInsider.com:

BofA/Merrill Lynch downgraded Paycom Software (PAYC) to Neutral and target $91
Past Rating: Buy
Past Target Price: $73
Issuance Date: 2018-09-26

Not a StreetInsider.com subscriber so was only able to get headlines off Interactive Brokers.

Current price: $157

From BA/ML:

HCM leader but downgrading PAYC to Neutral on valuation
PAYC has outperformed Nasdaq by 85% YTD, driven by consistent execution on topline and bottom line. However, we are downgrading PAYC to Neutral as we believe the stock fairly values profitable growth (Rule of 60) over the next 5 years. We are keeping our above-Street estimates (FY18E/FY19E revs/EBITDA margin of $557mn/$712mn and 43.4%/44.4% vs. the Street at $555mn/$687mn and 42%/41.7%), but are raising our PO for PAYC to $160. Our PO is based on the triangulation of three valuation metrics – EV/recurring rev on FY23E, EV to FCF on FY23E, and 15-year DCF. On our CY19E rev which is a Street high, our PO reflects 12x EV/recurring rev and ~52x FCF, but this is in- line with SaaS comps recurring rev growth of 25-30% for CY19E. PAYC’s current enterprise value also reflects 19.5 years of customer growth based on our proprietary LTV/CAC framework (Table 1, 2). This compares with 12 years for PCTY and about 6.3 years for ULTI. Nevertheless, we note that PAYC’s LTV to CAC ratio is 5.3x now vs. 4x last year (albeit CAC would be higher in ASC605 vs. 606) and is directly correlated to the 40%+ EBITDA margin vs. 20-30% for peers PCTY/ULTI. In our view, PAYC can sustain its rule of 60 model l-t. This thesis is supported by our survey of ~200 Paycom customers (page 14). Key survey highlights include 1) 92% of respondents have had a good experience with Paycom’s solution and 97% of respondents will renew their contracts; 2) 74% of respondents use mobile solution and 96% have had a good experience; 3) 63%+ of the respondents noted that Paycom has increased pricing already; 4) only 2/3rd of customers use payroll and <1/3rd use other modules – suggesting upsell opportunities.

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So why did StreetInsider.com quote a target of $91 when the report states:

but are raising our PO for PAYC to $160.

Found the PDF that orthomim quoted the details. The next ticker in the Report was PCTY with a target of $91. So I’ll bet StreetInsiders bot misread the report.

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Would anyone happen to know what the Rule of 60 mentioned in the report means?

Have heard of the Rule of 40, but not 60.

Thanks,
AJ

Yesterday SQ rolled out a payroll app:

https://finance.yahoo.com/m/722e291f-f13f-3224-95a6-89761834…

Square stock extends gains after company rolls out new payroll app; ADP, Paychex stocks fall

Square Inc. SQ, -1.11% rolled out a new, dedicated payroll app on Tuesday, which will allow employers to approve time cards and pay employees. Over the past few quarters, merchant services such as payroll have helped contribute to the company’s strong growth. Square has been successful in convincing merchants to pay for additional services beyond payment processing, including instant access to funds and invoicing. The new app puts the payroll service in a dedicated place…

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I think I’m going to sell all my Paycom and redeploy into Square.
A

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