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The severity of the COVID-19 pandemic was unexpected, prompting government leaders to impose hard lockdowns globally. It limited business transactions and capacity, which led to massive losses and sudden shutdowns. It took quite some time for businesses to recover as restrictions eased.
Even so, it has regained its footing as many companies reopened and rehired employees.
On a lighter note, these unprecedented events opened many surprising business opportunities regardless of size. Many business owners realized their company could survive even if employees worked at home. This discovery led to the rise of remote work flexibility. And even if many businesses have already implemented return-to-office policies, hybrid work setup is now a popular trend.
Amid all these, human capital management (HCM) solutions have become a staple for most companies. Entrepreneurs heavily rely on HCM’s functionalities to enhance efficiency and precision.
Unsurprisingly, many SMEs, startups, and large corporations are investing in HCMs, and many investors are drawn to HCM stocks. As such, this article will explain why it’s cool to invest in HCM stocks and list down the best companies for dividends and value.
Why HCM Solutions Are Business Staples
The pandemic prompted many businesses to operate at a limited capacity. But it was also a pleasant surprise for many employees as it allowed them to work from home. However, it did come with particular challenges.
For instance, business owners had to ensure employee productivity despite lower monitoring capacity. And even employee monitoring software could not do everything at times. Payroll management and workflow optimization have also become challenges they had to address.
Even so, the gradual economic recovery and government support allowed the business sector to rebound. And even if restrictions have already eased, employers and employees still favor hybrid work.
In a study, over half of the total companies worldwide offer remote work flexibility. In contrast, 52% of employees work remotely at least once weekly. This is mainly because hybrid work has lowered employee turnover by 25% since the Great Resignation.
Another study shows that 12.7% of employees in the US work from home while 28.2% work hybrid.
With all these trends, companies invest in technologies, particularly human capital management or HCM solutions.
These help businesses enhance payroll management regarding timeliness and accuracy. It prevents confusion between employees and human resource officers. It also avoids risks with the Internal Revenue Agency and Bureau of Labor.
Even better, HCM solutions streamline HR tasks and employee workflow management. In the long run, it can help increase productivity, generate more sales, and reduce operating expenses.
HCM solutions also help in easier business formations, which is crucial in the current environment where people can do almost every transaction virtually. Entrepreneurs studying how to start an LLC or corporation must view employees as assets to be acquired and managed to gain a competitive advantage and increase business value.
Hence, HCM solutions play a crucial role from the start of the business to its expansion.
Why Investors Must Consider HCM Solution Stocks
HCM solution stocks are attractive today, given the high preference for hybrid and remote work setups. HCM solution companies enjoy high demand as the digital revolution continues to peak.
These solutions are transforming the labor market. They are crucial for boosting employee retention and ensuring efficient payroll and workflow management in the era of hybrid work.
In addition, remote work is deeply tied to high travel demand. The pent-up demand in the industry remains high and is poised to fully recover in 2024. Winter and spring travel expectations are still rosy, even if the autumn hype has already ebbed.
Lastly, the HCM solution industry does not face overcapacity, unlike many other industries. The number of providers is still limited, so demand elasticity is low. There are few substitutes, and competitors maintain product differentiation. Publicly traded companies enjoy much higher demand, propelled by their popularity and huge market presence.
All these three factors contribute to the sustained growth and expansion of HCM solution companies. As inflation decelerates, you can expect higher revenues with manageable costs and expenses. Higher revenues and
Pecking Orders
As for pecking orders, these are our top stock picks in the HCM industry. The tables below show how company fundamentals and stock prices have changed.
|
3Q22 |
3Q23 |
3Q22 |
3Q23 |
3Q22 |
3Q23 |
5-Year Average |
Current |
|
|
Revenue |
Revenue |
Optg. border-style: solid; vertical-align: top;”> Optg. border-style: solid; vertical-align: top;”> Net Debt/ EBITDA |
Net Debt/ E BITDA |
PE Ratio |
PE Ratio |
|||
|
Paychex (PAYX) |
$1.19 |
$1.26B |
39.7% |
40.2% |
-0.25x |
-0.26x |
29.21x |
26.50x |
|
ADP (ADP) |
$4.22B |
$4.51B |
24.3% |
24.6% |
0.45x |
0.43x |
30.23x |
27.60x |
|
Paycom (PAYC) |
$0.32B |
$0.41B |
22.2% |
23.1% |
-0.72x |
-0.72x |
56.0x |
35.60x |
Data source: MarketWatch
Computed by the Author
Concerning fundamentals, Paychex (PAYX) appears to be the optimal choice. It has a decent revenue growth of 5.9%. Also, its operating
Its operating leverage decreased from 50% to 48%, showing better management of variable costs. Indeed, the company keeps efficient asset management to cope with cost pressures.
Automatic Data Processing, or ADP, ranks second. This firm is one of the largest publicly traded HCM solutions companies.
Growth appears relatively limited lately, but it capitalizes on business expansion, matched with efficiency to generate more sales and raise
Paycom (PAYC) is our third pick. It is the smallest company among the three, but its expansion in recent years helped it go head-to-head with much larger firms.
Its operating revenue is still quite lower than the other two, but the 27% YoY growth is remarkable. Also, its operating
Paycom’s BETI is a double-edged sword that confuses its near-term growth outlook. Note that a huge portion of its customer base is already using BETI. Hence, its opportunity to grow further or generate new bookings is limited.
As for sustainability, all three companies show very high liquidity levels. The low and negative Net Debt/EBITDA Ratio indicates adequate cash reserves and impeccable core earnings. These are enough to cover all its borrowings. These companies can cover all borrowings in less than a year.
Concerning their valuation, all stocks appear to be much cheaper than their five-year average. PAYC had the most notable decrease in PE Ratio for five years. However, PAYX remains the most affordable among the three. Its difference from ADP is still very low, though.
Lastly, if we analyze the stock price movements over the past decade, all three stocks had double-digit annual returns. They even exceeded the S&P (SPX) average, which their lower sensitivity to macroeconomic shocks can drive.
PAYC had the best returns of 40.70%. However, its volatility, measured by the standard deviation, is too high at 46% when the average was only 31%. ADP appears to be the most stable, with increasing returns and steady price changes.
Bottomline
Human capital management, or HCM solutions, are becoming more popular today as the digital revolution peaks. Companies capitalize on them to enhance efficiency, reduce employee turnover, and generate more earnings.
So, it’s no wonder the HCM industry is expanding with sustained revenue growth and stable.
