Paycom is cash flow positive and has this advantage over its competitors

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In this clip of “Inventory updates in 3 minutes” on Motley Fool live, recorded on July 29Motley Fool Contributor Toby Bordelon Takes a Look at an HR Tech Company Paycom software (PAYC 1.54%) compared to competitors Automatic data processing and Payment. Paycom may trade at a higher valuation than others, but does its faster growth rate compensate for its volatility?

Toby Bordelon: Here’s a little relative valuation chart I’ve put together. You might recognize this if you follow our in-depth reviews. This is a quick assessment format that we use here. What you can take a look at here, when you look at this you see a much higher price to sales ratio from Paycom, a much higher forward P/E profit, that’s the P/E profit ahead of 12 months that I pulled from there Yahoo!.

On the other hand, however, they have a much higher growth rate for their revenue and higher gross margins. You look at that, yes, richly rated, but look at that growth. Do they deserve premium valuation? Maybe they do. If you increase your revenue by 30% compared to your competitors, who each increase by about 10%, you may deserve a little valuation. It may be overrated there but I’m not sure it’s not deserved.

Just look at the five-year chart, you can see that Paycom is, by far, more volatile than these other two. They’ve had a nice run up, they’ve come down a lot, their valuation isn’t as rich as it was just a year ago, but much more volatile. I think what you’re seeing here is a higher-growth business, which is going to be more volatile, it’s going to be a bit more difficult. But it’s been shown that they can grow faster than their competition, as they’ve been showing lately, and that’s worth something. Is it worth the current price? Different opinions on this, but rapid growth is definitely worth something. I will also point out that the board just increased the stock buyback plan, they authorized $550 million in stock buybacks. If the short report or earnings report they release next week blows up the stock, we may see some board buying on that, which wouldn’t be a terrible thing.

Toby Bordelon holds positions in Paycom Software. The Motley Fool fills positions and recommends Paycom Software. The Motley Fool has a disclosure policy.

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