2023-09-26 11:06:55 ET
Summary
- Ceridian HCM Holding Inc. provides human capital management software and services to help businesses attract, manage, and retain talent.
- The worldwide human capital management software market is projected to reach $32 billion by 2026, with the BFSI sector expected to show the highest growth rate.
- Ceridian HCM's financial trends show rising revenue, positive operating income, and improving gross profit margin.
- I reiterate my Buy outlook on Ceridian HCM Holding Inc. at around $65.00 per share.
A Quick Take On Ceridian HCM
Ceridian HCM Holding Inc. ( CDAY ) provides human capital management software and services to enterprises to assist them in attracting, managing and retaining the best people for their organizations.
I previously wrote about CDAY with a BUY outlook at around $68.00 per share.
Management has raised its forward guidance despite macro headwinds, and the company looks to be well positioned to help its clients manage their labor costs.
I reiterate my previous Buy outlook at around $65.00 per share.
Ceridian HCM Overview And Market
Minneapolis, Minnesota-based Ceridian was created to help businesses improve their human capital results.
Management is headed by CEO David Ossip, who was previously founder and CEO of Dayforce, later acquired by Ceridian in 2012.
The firm has a partner program through connections with software integrators, consulting firms, brokers and small business sales channel partners.
According to a 2022 MarketsandMarkets research report , the worldwide human capital management market for software was an estimated $22.3 billion in 2021 and is forecasted to reach $32 billion by 2026.
This represents a forecasted CAGR of 7.5% from 2022 to 2026, which is a moderate growth level for an enterprise software segment.
The report stated that the BFSI (Banking, Financial Services, Insurance) sector would likely show the highest growth rate through 2026 due to the need for a centralized system of record and the need to exert more oversight over its employees.
The Asia Pacific region is expected to account for the highest market share as the markets of Latin America and the Middle East and Africa are still in the emerging stage.
Major competitive vendors that provide a range of software include:
- Workday
- Paycor HCM
- Oracle
- SAP
- Kronos
- Automatic Data Processing
- Ultimate Software Group
- IBM
- SumTotal Systems
- EmployWise
- Paycom Software
- PeopleStrategy.
Ceridian HCM’s Recent Financial Trends
- Total revenue by quarter has continued to rise, while operating income by quarter has remained positive in recent quarters:
- Gross profit margin by quarter has trended higher in recent quarters; Selling and G&A expenses as a percentage of total revenue by quarter have trended lower recently:
- Earnings per share (Diluted) have remained positive in the last two quarters, as shown in the chart below:
(All data in the above charts is GAAP.)
In the past 12 months, CDAY’s stock price has risen 19.76% vs. that of Paycor HCM’s ( PYCR ) drop of (19.06%):
For balance sheet results, the firm ended the quarter with $486.6 million in cash and equivalents and $1.2 billion in total debt, of which $6.8 million was categorized as the current portion due within 12 months.
Over the trailing twelve months, free cash flow was an impressive $163.2 million , during which capital expenditures were $23.7 million. The company paid $152.2 million in stock-based compensation in the last four quarters, the highest trailing twelve-month figure in the past eleven quarters.
Valuation And Other Metrics For Ceridian HCM
Below is a table of relevant capitalization and valuation figures for the company:
Measure [TTM] | Amount |
Enterprise Value / Sales | 7.8 |
Enterprise Value / EBITDA | 67.7 |
Price / Sales | 7.2 |
Revenue Growth Rate | 22.4% |
Net Income Margin | -1.0% |
EBITDA % | 11.5% |
Market Capitalization | $10,020,000,000 |
Enterprise Value | $10,790,000,000 |
Operating Cash Flow | $186,900,000 |
Earnings Per Share (Fully Diluted) | -$0.09 |
(Source - Seeking Alpha.)
As a reference, a relevant partial public comparable would be Paycor HCM:
Metric [TTM] | Paycor HCM | Ceridian HCM | Variance |
Enterprise Value / Sales | 6.9 | 7.8 | 12.6% |
Enterprise Value / EBITDA | 918.3 | 67.7 | -92.6% |
Revenue Growth Rate | 28.7% | 22.4% | -21.9% |
Net Income Margin | -16.9% | -1.0% | -94.4% |
Operating Cash Flow | $48,120,000 | $186,900,000 | 288.4% |
(Source - Seeking Alpha.)
CDAY’s most recent unadjusted Rule of 40 calculation was 33.9% as of Q2 2023’s results, so the firm has continued to improve on this metric, per the table below:
Rule of 40 Performance (Unadjusted) | Q4 2022 | Q2 2023 |
Revenue Growth % | 21.7% | 22.4% |
EBITDA % | 4.5% | 11.5% |
Total | 26.2% | 33.9% |
(Source - Seeking Alpha.)
Sentiment Analysis
The following chart shows the frequency of various keywords in management’s most recent earnings conference call:
Leadership and analysts frequently referred to "macro" conditions the firm and its clients are facing.
Analysts questioned management about what is causing an improved pipeline and growth in its average deal size despite these negative macro conditions.
The firm is seeing tailwinds from continued HR focus on digital transformation, workforce management needs and AI-enabled functions.
Average deal size is improving due to momentum with larger enterprises and increasing module density, which is the number of features included in a given module - 4x higher now than in 2021.
Commentary On Ceridian HCM
In its last earnings call (Source - Seeking Alpha ), covering Q2 2023’s results, management’s prepared remarks highlighted exceeding previous guidance on revenue and profitability.
Moreover, its Dayforce product recurring revenue rose by 39% on an as-reported basis, rising 28% YoY on a constant currency basis, ex-float.
The firm generated a record operating cash flow of $82 million for the quarter.
But, management did not provide any customer or revenue retention rate information other than to characterize its retention rates as continuing "to hold."
Total revenue for Q2 2023 increased by 21.5% YoY, and gross margin rose by 3.8%, both strong results.
Selling and G&A expenses as a percentage of revenue fell a whopping 7.0% year-over-year, and operating income rose sharply to $32.8 million.
The company's financial position is solid, with ample liquidity, $1.2 billion in debt, but very impressive free cash flow.
CDAY’s Rule of 40 performance has been improving sequentially and now stands at 33.9% for the current quarter.
Looking ahead, management raised its full-year 2023 revenue guidance growth rate to 21.5% at the midpoint of the range.
If achieved, this would represent an equal revenue growth rate versus 2022’s growth rate of 21.7% over 2021.
In the past twelve months, the firm's EV/Sales valuation multiple has dropped a net of 5.5%, as the chart from Seeking Alpha shows below:
The stock has recently sold off in concert with other software companies as the market appears to be punishing these firms potentially due to assumption changes about the cost of capital remaining "higher for longer."
However, on a fundamental basis, although the firm continues to face "macro" headwinds from the general economy, its products help clients manage their labor costs and staffing decision-making more effectively.
I view the current stock price dip as a buying opportunity, so my outlook on Ceridian HCM Holding Inc. is a Buy at its current price of $65.00
For further details see:
Ceridian HCM Ups Guidance As Large Deals Beckon