Paycom Software (PAYC) Q2 Earnings: Will It Surprise?

Paycom Software, Inc. (NYSE:PAYC) is set to report second-quarter 2016 results on Aug 2, 2016. Last quarter, the company posted a positive earnings surprise of 55%. Let's see how things are shaping up for this announcement.

Factors to Consider

Paycom Software reported better-than-expected first-quarter 2016 results, with its top and bottom lines surpassing the Zacks Consensus Estimate. The company also provided an encouraging second-quarter and full year 2016 revenue guidance. Also, year-over-year comparisons on both counts were favorable.

Revenue growth was steady, positively impacted by higher recurring revenues and greater traction in cloud-based offerings. Better-than-expected demand for advanced human capital management and payroll software solutions during the reported quarter were the other positives.

We believe that the higher adoption of Paycom Software’s Affordable Care Act (“ACA”) dashboard application that tracks employee count, employee status and health care plan affordability will act as a tailwind for the company. Also, the cross-selling of newer products to the existing client base is expected to boost revenues.

Nevertheless, competition from companies like Paylocity Holding Corp. (NASDAQ:PCTY) , Intuit Inc (NASDAQ:INTU). and Paychex (NASDAQ:PAYX), Inc. remains a headwind.

Earnings Whispers

Our proven model does not conclusively show that Paycom Software is likely to beat the Zacks Consensus Estimate in the upcoming release. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, this is not the case here as elaborated below.

Zacks ESP: The Earnings ESP for Paycom Software is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 13 cents per share.

Zacks Rank: Paycom Software has a Zacks Rank #3. Though Zacks Rank #1, 2 or 3 increases the predictive power of ESP, the company’s ESP of 0.00% makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Stocks to Consider

Here are some other companies, which are worth considering, as our model shows that they have the right combination of the two key elements:

Demand Media, Inc. (NYSE:DMD) , with an Earnings ESP of +18.61% and a Zacks Rank #3

Holly Energy Partners L.P (NYSE:HEP) , with an Earnings ESP of +2.27% and a Zacks Rank #3