Paycom Is Our Kind Of Company And It Is Time To Buy

Paycom (PAYC) reported its Q3 earnings last night. Results were more or less to expectation, with a 22% rise in revenue supported by strong profitability (on both an earnings and cash basis).

The big "problem", and the one that has sent the stock tumbling almost 30% this morning, was forward guidance. The company guided for just 14% growth in revenues for Q4, and in its conference call, guided for 10-12% revenue growth in 2024. Both of those figures were well below the 20%+ number the market had gotten used to and expected from Paycom.

Admittedly, that was a surprise (my model also looked for 20% growth in 2024). So what gives here?

Management pointed to critical uptake on its self-payroll tool, Beti, which we've discussed some in prior updates. Beti has proven to dramatically reduce payroll errors so that payroll is correct the first time through, saving Paycom's clients both time and money in correcting it.

Here's the rub, though... fewer payroll correction runs means less revenue for Paycom. Some of its large clients may have had to run 4, 5, even 6 extra payroll cycles a quarter to fix errors (and paying Paycom each time). Now, under Beti, they are running the usual 13 and getting it right the first time.

Investors can look at this two ways. One way - and this was a popular viewpoint with analysts on the conference call - is that Paycom is "cannabalizing" its service sales and under-charging its clients for using Beti.

Another way, championed by founder CEO Chad Richison and endorsed by GreenDot Stocks, is that Paycom is offering the best possible service to its customers by saving them time and money getting payroll right the first time. That creates a high ROI that will be a competitive advantage to Paycom when competing for new or expanded business. Remember, this is a firm with only about 5% penetration into its potential market. Management re-iterated that its lowered guidance was not due to any demand or sales pipeline issues - this is a by-product of doing right by the customer.

I love that philosophy in business. Thinking 2, 5, 10 years ahead instead of just to the next quarter or year is what the greatest companies do. Providing a great product that helps your customers improve their business is what the greatest companies do. I will always be proud to own and recommend firms that do so.

We do have to account for some slower near-term growth. After adjusting my model, Paycom's fair value does dip by about 10%, from a previous $330 down to $302. Still, that represents substantial upside from where the stock is trading right now (around the $160 mark). I'm thrilled to add Paycom to the Buy List today! Over time, I expect it to provide a very good return indeed from these levels.