PAYC

We rate Paycom Software, Inc. (PAYC) as a Reduce with a composite score of 48.4/100 at a current price of $119.35. The quantitative profile shows weakness across multiple dimensions, suggesting limited upside potential and elevated risk of underperformance relative to peers over the next 12 months.

The rating is primarily driven by strength in stability (69th percentile) and quality (67th percentile), which together account for the majority of the composite score. Offsetting weakness in momentum (28th percentile) and investment (28th percentile) tempers our overall conviction. We assign a Wide Moat rating (72/100), High uncertainty, and Standard capital allocation.

Key items to watch: momentum to confirm whether the current price trend has legs; balance sheet deleveraging progress. Any material change in these dynamics could warrant a reassessment of our rating. The moat trend is stable, which suggests the competitive landscape is stable for now.

Paycom Software, Inc. holds a top-quartile position (#0 of 50) within the Services sector, based on our composite quantitative scoring across quality, value, momentum, and stability factors. The composite score of 48.4/100 places it at rank #2279 in our full 7,333-stock universe. With a $12.0B market capitalization, Paycom Software, Inc. operates at meaningful scale within the Services sector, providing competitive advantages in distribution, procurement, and customer reach.

Revenue is growing at 13%, though momentum at the 28th percentile suggests the market has not yet fully recognized this trajectory. This potential disconnect between fundamental improvement and market recognition could represent an opportunity for patient investors if the growth trend persists.

The margin cascade tells an important story: gross margins of 82% (+22.7pp vs sector) narrow to operating margins of 26% (+22.5pp vs sector) and net margins of 20.9%, yielding a gross-to-net conversion rate of 25%. This conversion rate is typical for the sector, suggesting a standard cost structure without notable efficiency advantages or disadvantages.

At a current price of $119.35, Paycom Software, Inc. is trading near fair value based on current fundamentals. Our value factor score of 63/100 reflects a composite assessment across multiple valuation metrics including price-to-earnings, price-to-book, EV/EBITDA, and price-to-sales ratios relative to both sector peers and the broader market. Valuation metrics are mixed, with no strong signal of mispricing in either direction.

The stock currently trades at a P/E of 15.2x (a 36% discount to the sector median of 23.7x), EV/EBITDA of 10.4x (near the sector median), P/B of 3.6x, P/S of 3.2x. The below-sector P/E suggests possible undervaluation or the market pricing in near-term headwinds.

We assign a High uncertainty rating to Paycom Software, Inc.. Key risk factors include significant leverage (339% debt-to-equity). The wide range of potential outcomes widens our fair value estimate and increases the possibility of permanent capital impairment. Investors considering this name should size positions accordingly and demand a meaningful margin of safety before initiating.

Specific risk factors that inform our assessment include: significant leverage (339% debt-to-equity). Each of these factors independently widens the distribution of potential outcomes, and in combination they create a risk profile that demands careful position sizing. The stability factor at the 69th percentile and quality factor at the 67th percentile provide a quantitative summary of the overall risk landscape.

Key risk mitigants include: healthy gross margins of 82% provide a buffer against cost pressures; above-average stability (69th percentile) suggests predictable business dynamics. These factors partially offset the identified risks and provide downside protection in adverse scenarios. On balance, the risk-reward profile warrants caution and disciplined position management.

We rate Paycom Software, Inc.'s capital allocation as Standard. Management has shown adequate — though not exceptional — stewardship of shareholder capital. Returns on equity stand at 23.8%, and the balance sheet is managed within acceptable parameters (D/E: 339%). Exemplary allocators typically sustain ROE above 20% and D/E below 50%; Paycom Software, Inc. falls short on at least one dimension.

There is room for improvement in optimizing the capital structure or enhancing shareholder returns. The 0.72% dividend yield provides some income return, but the overall capital allocation framework would benefit from either higher reinvestment returns, improved balance sheet efficiency, or increased shareholder distributions. We will monitor for signs of strategic improvement that could warrant an upgrade.

In summary, Paycom Software, Inc. receives a Reduce rating with a composite score of 48.4/100 (rank #2279 of 7,333). Our quantitative framework assigns a Wide Moat (72/100, trend: stable), High uncertainty, and Standard capital allocation. The average factor score across quality, value, momentum, stability, and investment is 51/100.

Our analysis does not support a constructive view on Paycom Software, Inc. at this time. The combination of the current quantitative profile, high uncertainty, and standard capital allocation suggests unfavorable risk-reward at current levels. We recommend investors avoid new positions and existing holders consider reducing exposure.