Mizuho Takes Bullish Stance On Ultimate Software After Company's 'Growing Pains'

The Ultimate Software Group, Inc. ULTI received an upgrade from Mizuho in a note that said the company is overcoming recently delays and employing a "healthy conservatism" in its 2018 forecast. 

The Analyst

Mizuho analyst Abhey Lamba upgraded shares of Ultimate Software from Neutral to Buy and increased the price target from $200 to $250.

The Thesis

Estimates for the next 12 months at Ultimate Software have upside potential, with go-live delays "under control" and a conservative initial 2018 forecast that derisks estimates, Lamba said. (See the analyst's track record here.) 

The delays that were experienced by Ultimate Software are "growing pains" for a company that's expanding up-market and "seem to be accounted for in its outlook," Lamba said. 

Ultimate Software's initial 2018 forecast assumes no contribution from fourth quarter 2017 bookings to recurring revenue guidance in 2018; conservative go-live times for recent contract backlogs; 94-percent visibility into a full-year recurring revenue growth target of 20-plus percent; and consistent retention rates in the recent past, according to Mizuho. 

"In all, as go-lives potentially contribute to growth in 2H18 — against conservative initial assumptions — we think management could raise its forecast through the year," Lamba said. 

Ultimate Software is scheduled to release its fourth quarter 2017 results after the market close Feb. 6.

Based on channel checks, Mizuho said it expects results to fall in-line to modestly above current revenue and earnings per share estimates. Ultimate Software could also raise its full-year growth guidance by a point or so, Lamba said. 

On valuation, Ultimate Software represents an attractive value at current levels of around 6x sales, the analyst said. The stock is expected to react to any potential upside to its initial forecast as well as modest multiple expansion, Lamba said. 

The Price Action

Shares of Ultimate Software are up about 18 percent over the past year.

The stock closed Monday up 2.31 percent at $225.87. 

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Photo courtesy of Ultimate Software.