Paylocity Up To Strong Buy: Should It Be In Your Portfolio?

On Aug 12, Zacks Investment Research upgraded Paylocity Holding Corporation (NASDAQ:PCTY) to a Zacks Rank #1 (Strong Buy). The upgrade came on the back of better-than-expected fourth-quarter fiscal 2016 results and strong fundamentals.

Also, Paylocity’s shares are up 12.5% year-to-date and the company has a strong return of 80.7% over the past six months. These make the company an attractive investment opportunity. Paylocity also delivered positive earnings surprises in the last four quarters with an average beat of 71.1%.

Paylocity’s revenues came in at $58.9 million in fourth-quarter fiscal 2016, up 49.6% year over year, and beat the Zacks Consensus Estimate of $57 million. The year-over-over increase was driven by solid sales and operational implementation. The top line was also backed by a 51% surge in recurring revenues and a 13% increase in implementation and other revenues.

Though, the company incurred adjusted loss (excluding all one-time income and expenses but including stock-based compensation) of 10 cents per share, it was narrower than the Zacks Consensus Estimate of a loss of 12 cents.

Buoyed by better-than-expected fourth-quarter results, the company provided positive first quarter and fiscal 2017 guidance. For the first quarter of fiscal 2017, Paylocity expects revenues in the range of $63 million to $64 million. The Zacks Consensus Estimate is pegged at $64 million. Non-GAAP earnings per share are expected to be within 1–3 cents.

For fiscal 2017, Paylocity anticipates revenues in the range of $296 million to $298 million. The Zacks Consensus Estimate is pegged at $297 million. Non-GAAP earnings per share are expected within 35–38 cents.

Going ahead, we remain positive about Paylocity’s regular investments in SaaS technology. Notably, over the past few quarters, clients moving from traditional payroll service providers to the company’s SaaS-based services generated a significant portion of Paylocity’s revenues. Therefore, we believe that regular investments in technological upgrades, along with product innovations, will continue to boost the company’s top line over the long run.

Furthermore, higher adoption of Paylocity’s ACA dashboard application, which specializes in tracking employee count, employee status and health care plan affordability, will act as a tailwind.

However, competition in the payroll processing sector from new entrants as well as existing players such as Automatic Data Processing, Inc. (NASDAQ:ADP) , Oracle Corporation (NYSE:ORCL) and SAP SE (TO:SAP) remains a major headwind.