Paycom Dec 2018 Quarter

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The reason I’ve maintained interest (and sometimes shares) in Paycom is because, although revenue had been growing at only ~30% for a long time, profit had been growing much faster. As a matter of fact, Operating Income has soared:

2017: 78.6m
2018: 173.7m (up 121%)

The problem is, this year they have also restated 2017 expenses (due to changes in laws I think), so now the picture looks like this:

2017: 112.6M
2018: 173.7m (up 54%)

Still great, of course! And that’s why Paycom has done so well. But inevitably, that 54% must come down to ~30% to match revenue. They’re already pumping almost 30% of revenue to the bottom line…there’s only so much margin improvement they can squeeze out!

When that happens, I think we’ll see the PE (which is now ~65) compress to around 30 as well. In other words, I don’t think we’ll see the share price grow even as fast as the revenue does.

I think they will continue to beat the market, but I think the CAGR will be under 30%, possibly under 20% since there will be some multiple compression. Better than a poke in the eye! But nothing like some of the other companies we’ll find here, hopefully!

Bear

PS For anyone unconvinced by the numbers above, break down the last 3 quarters. Operating income grew by:

Q2: 129%
Q3: 65%
Q4: 19%

I rest my case.

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Nice company, but they are at $10b mkt cap and just guided to $712m for all of this coming year.
So it seems they are being valued like a 50% grower instead of the 30% they are, regardless of increase in profit profile.

I missed out on this one…just not sure I would jump in over the next 12 months at this point.

Dreamer

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Bear -

Quick question on your Operating Income point. You quoted GAAP numbers. Based on most of what I’ve learned here, I’ve been tracking non-GAAP numbers for both Operating and Net Income wherever I can find them. Since Paycom only listed GAAP figures for Operating Income, I was tracking Adjusted EBITDA and non-GAAP Net Income instead. EBITDA growth has drifted from 46% to 22% to 19% the last 3 Q’s while Net Income has gone 70%, 32%, -33%, which both seem to support your broader point.

From a balance sheet standpoint, is that a fair proxy? I’m just trying to understand the right times to track and trust GAAP numbers rather than non-GAAP.

Thanks,

Joe

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I’m just trying to understand the right times to track and trust GAAP numbers rather than non-GAAP.

Joe,

In this case I don’t think it matters – the trend will be the same either way. As long as you’re comparing apples to apples, you’ll do fine.

Bear

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