Analyst: Ultimate Software Executes, But Further Multiple Expansion Unlikely

Shares of The Ultimate Software Group, Inc. ULTI are up over 25 percent thanks to "strong execution in a healthy demand environment," according to Wedbush, but the research firm is stepping to the sidelines. 

The Analyst

Webush analyst Steve Koenig downgraded shares of Ultimate Software from Outperform to Neutral and increased the price target from $234 to $255 on higher peer multiples.

The Thesis

Ultimate Software is expected to have a solid year, with potential revenue and earnings per share upside, Koenig said in a Wednesday note. Wedbush's channel checks revealed a greater urgency in enterprise IT investment and SaaS adoption trends that are likely to benefit the company, Koenig said. 

"A stable sales organization should set the table for sales productivity improvements and sustained FY18 momentum, if the demand environment remains robust."

Ultimate's guidance for 20-percent recurring revenue growth is "achievable," with any risk being to the upside, the analyst said. 

Ultimate Software's project to create a next-gen version of its platform, core products and add-on modules began in 2012 and is expected to wind down by 2020, Koenig said. Wedbush expects an increase in operational investments to support growth as the project costs moderate.

Ultimate's capital expenditure is likely to increase to $90 million in 2018, keeping the free cash flow margin rangebound in the 14-14.5-percent range, at least for the time being, Koenig said. 

"ULTI shares are now trading at about 50x EV/FCF on our FY18 estimate ($158M, about $5/ share), and our long-term DCF leaves less room for upside." 

The Price Action

Ultimate Software shares were down 0.45 percent at $247.65 Wednesday.

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