Paycom (PAYC 1.21%), a developer of human capital management (HCM) software, has been serving up some impressive business results and laying the foundations for a global expansion initiative that could prove rewarding for shareholders. On the other hand, the stock got caught up in the market’s pivot away from growth-dependent companies in 2022, and continued to lose ground this year. Its share price is down 51% from its high.

But in the wake of its fantastic first-quarter report, this looks like a great time to invest in the promising enterprise software company.

Serving up great results and rewarding shareholders

Paycom’s Beti platform provides HCM services, including human-resources tools and payroll services, and has been making impressive gains in its corner of the software market. The company’s revenue grew 28% year over year in the first quarter to $452 million, and net income came in at $119 million — good for a 26% margin. Net income was up roughly 30% compared to the prior-year period, and diluted earnings per share were up 29.5%.

The company is solidly profitable, and its sales and earnings are increasing at encouraging rates. Paycom also recently announced that it would begin paying a dividend of $1.50 per share annually. Based on the current share price, that gives it a yield of roughly 0.6%. Admittedly, that’s not a big yield, but Paycom’s solid financial footing and strong earnings growth could allow it to deliver substantial payout growth over time if management chooses to do so.

Paycom’s strong financial foundations

Paycom ended Q1 with $505.6 million in cash and equivalents on the books against just $29 million in debt. In summary, this is a well-capitalized company with a strong recurring revenue base that’s serving up consistent profits and earnings growth. Given its cash position and solid profitability, the business is in good shape to continue funding internal growth initiatives, bridging existing services into new markets, and funding stock buybacks and dividend payouts. 

Impressive growth at a reasonable price

Paycom trades at roughly 35 times this year’s expected earnings and a bit under 9.5 times this year’s expected sales. While that’s clearly a growth-dependent valuation, the stock actually looks reasonably priced in the context of the business’s recent growth and outlook. 

Data by YCharts.

Of course, there is still some risk here. As a provider of payroll and HR software, Paycom is naturally sensitive to economic conditions. Many economists now expect the U.S. to dip into recession this year or next, and the company could face a more challenging operating backdrop as a result.

On the other hand, nearly all of its sales base is built on recurring revenue streams, and the subscription-based nature of the business should continue working to its advantage. The company’s Beti platform is highly rated in its service categories, and customers would face significant switching costs if they decided to move to other providers.

At the end of 2022, Paycom retained more than 99% of the customers that had been using Beti in the previous year, and it’s forecasting strong sales performance for the remainder of 2023. Even in the face of macroeconomic headwinds, management is guiding for revenue to grow roughly 25% this year. With its high-quality, comprehensive HCM software services, Paycom should be able to ride out any economic turbulence and deliver even stronger performance as conditions improve.

This is a sturdy business with attractive long-term growth potential. Management estimates that it is currently capturing just 5% of its total addressable market, and that market should continue to grow as the company pursues its global expansion initiatives.

HR and payroll software may not be the most exciting verticals in the tech sector, but businesses don’t have to be flashy to deliver great returns for shareholders. For investors on the hunt for growth at a reasonable price, Paycom stock looks like a smart buy right now.

Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Paycom Software. The Motley Fool has a disclosure policy.

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