Tactical Shift And Innovative Products Propel Revenue In Manufacturing And HCM Markets

Key Takeaways

• Dayforce's strategic focus on industries like manufacturing, retail, and hospitality, along with expanding their platform's core value propositions, is poised for growth.
  
• The differentiation of Dayforce Wallet and a significant contract with the Government of Canada highlight increasing and potential revenue streams.
  
• Dayforce faces challenges from geopolitical risks, currency fluctuations, project execution risks, increasing competition, and the dependency on new product success.

Catalysts

Operates as a human capital management (HCM) software company in the United States, Canada, and internationally.

• Dayforce's strategic pivot to industries such as manufacturing, retail, and hospitality is expected to continue driving strong business momentum and revenue growth, as these sectors have shown resilience and traction for Dayforce's offerings.
  
• The continued expansion of the Dayforce platform's core value proposition, focusing on simplicity at scale, financial ROI, and employee engagement, is likely to attract more customers in the growing HCM market, thereby increasing revenue.
  
• Strong demand for the differentiated Dayforce Wallet, which is expected to more than double its revenue this year, provides a fast-growing income stream that could significantly boost overall company earnings.
  
• The payroll modernization project with the Government of Canada represents a substantial contract that could enhance Dayforce's financial forecast with a mix of software and service revenues, increasing both short-term earnings and long-term revenue potential.
  
• Dayforce's planned $500 million share repurchase program reflects confidence in the company's financial strength and future outlook, which can positively impact earnings per share and may make the stock more attractive to investors.

Assumptions

• Analysts are assuming Dayforce's revenue will grow by 14.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 11.9% in 3 years time.
• Analysts expect earnings to reach $289.6 million (and earnings per share of $1.87) by about September 2027, up from $47.1 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $160.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 49.4x on those 2027 earnings, down from 182.8x today. This future PE is greater than the current PE for the US Professional Services industry at 27.1x.
• Analysts expect the number of shares outstanding to grow by 2.88% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.38%, as per the Simply Wall St company report.

Risks

• The reliance on global markets for customer growth and the potential negative impact of geopolitical events or economic downturns in key regions on revenue and expansion.
  
• The risk associated with currency fluctuations, especially the weakening Canadian dollar, which could impact reported revenues and profit margins by adding FX headwinds.
  
• The execution risk related to the payroll modernization project for the government of Canada, a significant contract, which, if delayed or not executed as planned, could affect future earnings and revenue recognition timing.
  
• Increasing competition in the HCM space, potentially leading to pressure on pricing, customer acquisition, and retention, which could impact net margins.
  
• Dependency on the success of new product innovations such as Dayforce Wallet and international payroll capabilities; if these do not achieve expected market acceptance, it could negatively impact revenue growth and technology investment returns.

Valuation

• The analysts have a consensus price target of $69.08 for Dayforce based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $90.0, and the most bearish reporting a price target of just $55.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.4 billion, earnings will come to $289.6 million, and it would be trading on a PE ratio of 49.4x, assuming you use a discount rate of 6.4%.
• Given the current share price of $54.47, the analyst's price target of $69.08 is 21.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.