Ceridian HCM Holding: Maintaining Its Strong Growth Momentum

Overview

My recommendation for Ceridian HCM Holding Inc. (NYSE:CDAY) is a buy rating. CDAY emerges as a compelling investment choice, driven by its impressive second quarter financial performance and strategic global expansion. The robust growth of its flagship product, Dayforce, coupled with significant profitability metrics, underscores its market strength. CDAY's aggressive geographic expansion, marked by ventures into Germany and partnerships across other regions, showcases its global ambitions. Furthermore, the company's dedication to product innovation, especially its AI-enhanced analytics, positions it as a leader in the HCM market. With a target price suggesting a notable upside and a trajectory anchored in consistent growth and innovation, CDAY is primed for future success.

Business

CDAY is a global human capital management [HCM] software company. With its flagship platform, Dayforce, CDAY offers comprehensive solutions encompassing HR, payroll, benefits, workforce management, and talent management. Tailored for businesses of varying sizes, CDAY's innovative tools, including the Canadian-focused Powerpay, aim to streamline HR processes and enhance workforce productivity.

Since 2016, CDAY's revenue growth has been accelerating. While the growth rate stood at approximately 3% in 2016, by 2022, it had surged to an impressive 21.6%. This momentum doesn't appear to be waning, with market projections still forecasting robust double-digit growth rates for the company. On the profitability front, CDAY has marked a significant milestone by turning a profit recently. This positive shift commenced in the first quarter, with a reported net income of $9.9 million. In summary, not only does CDAY continue to exhibit a strong growth outlook, but it has also begun to consistently register positive net income figures.

Recent results & updates

CDAY's financial performance in the second quarter reported in August showcased robust growth and profitability. The company's flagship product, Dayforce, witnessed a significant 39% growth in its recurring revenue when adjusted for currency fluctuations. This growth underscores the increasing market adoption and the consistent value Dayforce delivers to its users. In terms of profitability, CDAY reported an impressive adjusted cloud recurring gross margin of 78.1%, marking an expansion of 1.77% compared to the same period last year. This indicates that the company not only generates substantial revenue from its cloud services but also retains a significant portion after accounting for direct costs. Further emphasizing its operational efficiency, CDAY's adjusted EBITDA stood at $98.4 million, representing 27% of the total revenue. This suggests that the company has been successful in translating its revenues into meaningful earnings before considering factors like interest, taxes, depreciation, and amortization. Additionally, highlighting the company's liquidity and ability to generate cash from its core operations, CDAY achieved a record operating cash flow of $82 million for the quarter. This combination of growth, profitability, and cash generation positions CDAY as a strong performer in its industry.

CDAY has been aggressively pushing its boundaries, both geographically and in terms of product innovation. Their venture into the German market, as discussed on the call, stands out as a testament to their global ambitions. They are in the advanced stages of rolling out a tailored payroll solution for Germany, with general availability expected by the first quarter of the upcoming year. This move is part of a broader strategy, as evidenced by their successful onboarding of a European aviation services company with a massive global workforce of 55,000 spread across 35 countries. Another significant partnership was forged with a leading professional services company, boasting 33,000 employees in nine countries, further solidifying CDAY's global footprint.

But their global aspirations don't stop in Europe. They've made significant inroads in other regions, such as the Middle East and Africa. A notable partnership was with a consumer goods manufacturer with 35,000 global employees, which expanded its collaboration with CDAY to cover regions including Europe, the Middle East, and Africa, building on their previous engagement in Latin America and Asia Pacific.

On the product development front, CDAY's commitment to innovation shines brightly. They've pioneered an extendable formula-based global payroll engine designed for swift adoption across countries in the Middle East and Africa. Their expansion into Germany's payroll landscape is also noteworthy, with charter customers already operational and a certification from the German ITS G board in the pipeline. Beyond these core offerings, CDAY is not resting on its laurels. They're harnessing the power of AI to elevate their analytics, aiming to offer even more intelligent and intuitive solutions to their clientele. This continuous evolution in their product suite, combined with their global expansion, underscores CDAY's ambition to be a dominant force in the HCM market, catering to the multifaceted needs of multinational corporations.

Valuation and risk

Based on my model, my target price for CDAY is $77.60. This suggests a potential upside of 12% from its current trading price. My optimism stems from the company's projected high double-digit growth rates over the forthcoming two years, which are in line with the market's estimates. This growth projection is anchored in CDAY's impressive second quarter performance, which highlighted significant strides in both growth and profitability. Furthermore, CDAY's strategic initiatives are noteworthy. They are not only expanding their footprint across various geographies but are also innovating and diversifying their product suite. The company's focus on integrating artificial intelligence into their product line-up is particularly promising, indicating their commitment to staying ahead of the curve and offering cutting-edge solutions. In sum, given the confluence of these positive factors, I believe CDAY is well-poised for sustained growth in the near future.

Currently, CDAY's forward EV/Revenue is 6.86x, closely aligning with its peer, Paylocity Holding Corporation (PCTY), which stands at 6.98x. This similarity in valuation is justified, given that both companies' Year 1 and Year 2 Next Twelve Months [NTM] growth rates are comparable. Specifically, CDAY projects growth rates of 22% and 17%, while PCTY projects growth rates of 27% and 18%, respectively. PCTY's slightly higher Year 1 NTM growth justifies its marginally higher EV/Revenue multiple.

By applying CDAY's current forward EV/Revenue ratio, I've derived a target price of $77.60 for CDAY. However, it's crucial to highlight that CDAY's Year 2 NTM EBITDA growth projection of 28% surpasses PCTY's 19%. If CDAY manages to exceed PCTY in EBITDA margins over the next couple of years, there's potential for its stock to see further appreciation. Given these factors, I recommend a buy rating for CDAY.

A downside risk for CDAY is the competitive landscape. CDAY is up against legacy vendors, who not only have deeper financial reserves but also enjoy substantial brand recognition and a strong foothold as established cloud vendors. If these competitors intensify their market presence through strategic acquisitions or by modernizing their platforms, CDAY's already fragile GAAP net income margin, which stood at 0.8% in the second quarter and only turned positive in the first quarter of 2023, could face further strain. Should this margin dip back into negative territory, it could have a pronounced impact on CDAY's stock price.

Summary

CDAY emerges as a promising investment opportunity, underpinned by its stellar financial performance, strategic global endeavors, and commitment to innovation. The company's recent financial results, marked by robust growth in Dayforce's recurring revenue and an impressive adjusted cloud recurring gross margin, underscore its market leadership and competitive advantage. CDAY's assertive global expansion, epitomized by its expansion into the German market and strategic partnerships with major enterprises, accentuates its global vision. Moreover, their unwavering focus on product innovation, especially the integration of AI technologies, showcases their dedication to maintaining a cutting-edge stance in the HCM market. Given these positive indicators and the company's growth trajectory, I recommend a buy rating for CDAY.