Brean Initiates Paycom With 40% Upside Target

Brean Capital on Monday initiated coverage of Paycom Software Inc PAYC with a Buy and a $45 price target. The stock closed at $31.95, a 40 percent premium.

Not only are Brean's analysts bullish the "human capital management" sector, but they said that Paycom is well positioned to take advantage. Paycom's core payroll products, the analysts mentioned, are "disrupting a sizeable, splintered, and sticky market."

The analysts based their thesis on five fundamental drivers:

1. The "sticky" payroll product. Between the legal and business obligations, switching payroll providers is a hassle – one that works in Paycom's benefit.
2. Churn elsewhere presents huge growth opportunities. Because Paycom is a fraction of the size of Automatic Data Processing ADP, movement there can present exponential growth opportunities at Paycom.
3. Potential for growth in "expense management." Brean noted that the expense management side of the business is underrated.
4. Growth into financial management tools. In addition to growth inside payroll, Brean expects Paycom to address other areas of financial management.
5. Advantageous technology. Brean credited Paycom's technology with its "industry-leading gross margin."

While Brean expects continued improvements in Paycom's business, the analysts did note that a worsening macro environment and execution risks may cause it to reevaluate its stance. The $45 price target reflects a discounted cash flow analysis.