paycom has been a home run investment for its long-term shareholders the stock is up more than
two thousand percent since it came public in 2014 but right now Shares are down more
than 40% from their all-time high so we think right now is a great time to add shares of this
compounding machine to our public portfolio why here's everything you need to know about
investing in paycom today thanks to common stock for sponsoring today's video as of the time it's
recording I am a shareholder of paycom and I am a shareholder as well so let's talk a
little bit about paycom this is a $20 billion business that trades under the ticker p-a-y-c
paycom's mission is to connect employees with their personal data this is simple and optional
it's not very inspirational so we think this is an okay mission statement paycom is a software as a
service company it started by focusing on payroll but has expanded to include all the functions of
a human resources department users can have one app where they can access everything from Talent
acquisition to payroll to HR management and Time and Labor Management there's a lot of competition
in its industry so one thing that pidcon has done to separate itself from its competitors is
by focusing on small and medium-sized businesses the company boasts a gross retention rate over 93
percent that's quite attractive given that this company primarily targets small and medium-sized
businesses historically customer acquisition costs have been surprisingly low eating up less than 30%
of paycom's gross profit demand has been robust since it came public and nearly all of the revenue
is recurring in nature according to the moat we don't think that paycom benefits from the network
effect at all but we do think that it does have switching costs working in its favor setting up
a payroll Processing Company is an arduous process and once a company gets on board they are loathe
to switch to an alternative provider that makes the fact this company's Revenue growth has been
so strong over the years incredibly impressive we also want to call out the fact that with such
low sales and marketing expenses there is some brand value associated with paycom within its
Niche you add all these things together and we believe that the moat is widening around paycom
let's take a look at the company's plan financials which are jaw-droppingly good Revenue growth has
been over 28 percent over the last three years gross margin is exceptionally high at nearly 85
percent and this company consistently cranks out positive net income on a gap basis much the same
can be said for free cash flow which has been positive and growing for a number of years the
balance sheet is in Stellar shape and paycom does have solid Returns on Capital paycom was founded
by Chad Richardson himself a salesperson in the payroll processing industry that decided to found
his own business he remains the president CEO and director of the company today and Richardson
gets solid remarks from employees garnering four stars on glassdoor.com and he makes up the bulk of
Insider ownership which totals 15 percent of the company and is worth about three billion dollars
today so can the company's growth rates continue we think the answer is yes because the company
benefits from a low level of optionality paycom got its start in payroll processing but has since
expanded into numerous HR functions while many of them don't generate huge amounts of Revenue
they do strengthen the company mode over time turning to operating leverage this company is
already spitting out a lot of cash there is room to improve but not as much as some other
Investments that we've made the total addressable Market is about 27 billion dollars of which it's
captured five percent and nearly all of the growth that paycom has had has been organic
in nature so how is paycom done for shareholders so far the answer is fantastic this company is
a 20 bagger since it came public in 2014 and it's also thumped the markets return over the last five
years the company also has an excellent track record with execution having outperformed wall
Street's expectation on the bottom line in each of the last four quarters paycom has been using
some of its extra cash to buy back shares but it is not paying down debt or offering a dividend as
of yet sounds good so far right well there are a number of important risks to keep in mind the
biggest Risk by far is competition as paycom is squaring off against Insurance competitions such
as ADP paychecks and workday there's also a number of other upstart companies that are also getting
into the payroll processing space so competition is the number one risk for investors to watch next
we believe that there are some outside forces that pose a threat to paycom remember this company is
primarily focused on small and medium-sized businesses in the United States now right now
the labor market is quite strong but if it weakens as some think it could in the year
ahead that would affect paycom's business finally there's valuation risk which we'll cover in just a
little bit so how did paycom do during its fiscal third quarter the answer is great Revenue grew 30
percent coming in ahead of wall Street's estimates and Management's guidance it was a similar story
on the bottom line with earnings per share growing 38 on a non-gaap basis blasting past
Wall Street targets look at the company's margins on a gap basis gross margins expanded slightly but
operating and net margins expanded meaningfully free cash flow took a step backwards but was
still positive at 44 million dollars net income expanded by more than 20 million dollars and the
balance sheet remains in outstanding shape for the current fourth quarter management called for
29 growth on the top line which was the head of wall Street's expectations and while the company
doesn't offer earnings per share guidance Wall Street affecting that number to grow by 34 for
the full year management is guiding for 30 top line growth from 1.37 billion dollars that's
ahead of what Walter was expecting and Wall Street is also expecting 33 growth on the bottom line so
what should investors watch moving forward well first keep an eye on that Top Line growth second
keep an eye on operating margins the company has consistently grown its profits faster than
Revenue in the past we want to see that Trend continue third look for gross retention rates
this is a number that paycom only releases at the end of every fiscal year so you should be coming
up when they release fourth quarter earnings and then finally keep an eye on free cash flow and
what the company does with that free cash flow historically this company has returned value to
shareholders through stock BuyBacks we want to see that continue overall we definitely believe that
the moat is at worst stable at best expanding and that the thesis for investing in this stock
is very much on track how did paycom score in our investing Frameworks the answer there is fantastic
paycom got an 81 in my framework which is well into my high quality business category and it
got a 10 and a half on my framework which makes it very investable but how about the company's
valuation today well first let's consider where the company is in its growth cycle we think that
the answer is somewhere between stage 3 and stage four the company is not fully optimized
for profits but it's getting close because of that it means that we can look at most of the items on
the income statement and draw conclusions about valuation from it so let's take a look at the
company's price to sales ratio price to gross profit price to earnings and price to free cash
flow ratios to see what kind of prices investors are paying today on a price to sales ratio paycom
is trading for about 15 times sales now that is very expensive compared to the rest of the market
but it's moderate given the company's history on a price to gross profit basis the company
has generated about 1.1 billion in trailing 12 months gross profit divide that by the company's
current market cap and that gives us a figure of about 18. again high in absolute terms but
paycom has deserved the premium historically next let's turn to free cash flow right now paycom is
trading for 95 times trailing free cash flow that is very high in absolute terms but it is roughly
in line with where the company is traded in the past on a price to earnings basis the company
is trading at about 75 times Trail earnings that's very high in absolute terms but again
this is a high quality business and if we look at the company's forward p e ratio it's trading
for about 54 times what's expected to earn over the next year again that's very high relative to
the rest of the market but pretty low given the company's history and its operating performance
so there you have it those are the reasons that we're going to be buying paycom stock
in our public portfolio that you can track by following us on common stock click the link in
the video notes below and you can leave a comment letting us know what you think about this purchase
on common stock we're going to read through those comments and choose the most insightful
one whoever wins will get $100 from commonstock we hope you found this video to be useful Brian's out
thank you