5 Reasons Why KeyBanc Upgraded Paycom

Payroll and HR provider Paycom Software Inc (NYSE: PAYC) is a high-quality SaaS name, according to KeyBanc Capital Markets. 

The Analyst

KeyBanc analyst Brent Bracelin upgraded Paycom from Sector Weight to Overweight with a $105 price target, suggesting roughly 25-percent upside from current levels.

The Thesis

Paycom's proven direct sales strategy could sustain 20-percent-plus revenue growth through share gains, irrespective of economic cycles, Bracelin said in a Monday note. (See the analyst's track record here.) 

"We believe longer-term plans to double the footprint to 90 office locations ensures an extended runway to sustain growth," the analyst said. 

KeyBanc views Paycom as a company with a best-in-class efficiency model, with more than 40-percent EBITDA margins. The 2018 guidance at the midpoint for 25-percent growth and 40-percent EBITDA margins appears conservative, Bracelin said. 

Low penetration of a large, $26-billion-plus total addressable market could be positive for Paycom, the analyst said. The SaaS company is gaining the most in mid-market, while  Workday Inc (NASDAQ: WDAY) is gaining the most in large enterprises, even as Automatic Data Processing (NASDAQ: ADP) and Paychex, Inc. (NASDAQ: PAYX) are losing share at the low end, Bracelin said. 

KeyBanc projects little-to-no Affordable Care Act risk through 2019.

Paycom shares, trading at 18 times EV/EBITDA on 2019 estimates, present a favorable risk-reward scenario, the analyst said. 

The Price Action

Paycom shares are up about 62 percent over the past year.

The stock was up 3.51 percent at $87.48 at the time of publication Tuesday morning. 

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Photo courtesy of Paycom.