🗞 7 Hidden European Compounders

Happy Sunday!

Here’s what’s on the docket for this edition of the FinChat Newsletter:

• 📉 Federal Reserve is keen on cutting rates

• 🛒 Target’s customers are finally returning

• 🔍️ Deep Dive: What went wrong at Paycom?

• 🇸🇪 7 European Compounders that no one talks about

And more, let’s dive in!

News of the week

• 💼 Carl Icahn Charged by SEC: On Monday, Carl Icahn, the legendary activist investor and Chairman of Icahn Enterprises, was charged $2 million by the SEC for failing to disclose pledges of securities against Icahn’s personal margin loans.

  Icahn Enterprises’ stock is publicly available to investors and the SEC’s allegations state that Carl Icahn pledged up to 65% of the company’s outstanding shares as collateral for his personal loans without disclosing it to investors. Icahn Enterprises’ stock has generated a total return for investors of -46% over the last 10 years.

• 📉 US Will Finally Cut Interest Rates: On Friday, during the Federal Reserve’s annual economic conference in Jackson Hole, Wyoming, after much anticipation Fed Chair Jerome Powell stated that “The time has come for policy to adjust”.

  This announcement came just two days after the US Department of Labor reported that the economy created 818,000 fewer jobs from March 2023 to March 2024 than it had initially calculated. With inflation cooling and this employment revision adding uncertainty to the labor market, Powell made his intentions clear by stating “We do not seek or welcome further cooling in labor market conditions.”

  The Nasdaq and S&P 500 were both up following the conference.

Earnings Roundup:

• 🛒 Target: At a time when retailers all over the world are revising guidance and cautioning investors about a tightening consumer, leading discount retailer Target reported better than expected results on both the top and bottom line. Same store sales at Target grew 2% driven by improved in-store traffic and earnings per share grew 42% versus the same period a year ago.

  During Target’s conference call following the report, Chief Commercial Officer Rick Gomez stated “we see a consumer that is still willing and able to spend. Yes, they're still being choiceful.” Target’s efforts to reduce prices appears to be helping customers return to the store even if they’re spending less per trip. Target’s stock was up 11% this week.

• 🥙 CAVA Group: Mediterranean restaurant chain CAVA reported same store sales figures that crushed estimates on Thursday. The fast growing, Maryland based chain has crushed the market since its 2023 IPO. This quarter, CAVA delivered 14.4% same store sales growth compared to the 7.6% growth analysts were expecting.

  CAVA also opened 18 new stores during the quarter while delivering improved restaurant level operating margins. With CAVA’s 21% jump in stock price on Friday, the total returns over the last 12 months now stand at ~175%.

• 🏦 Intuit: The software giant behind TurboTax reported its fiscal 4th quarter results on Thursday surpassing Wall Street’s estimates. Intuit, which is home to several notable financial platforms including TurboTax, Quickbooks, Credit Karma, and others, delivered $16.3 billion in revenue for 2024, up 13% from a year prior.

  Despite the strong top line growth and improving profit margins, Intuit’s revenue growth outlook of 12%-13% for 2025 came up short of what analysts were expecting. Intuit’s stock closed down 5% on Friday.

Company Spotlight: Paycom

Paycom was once seen as one of the most promising software stocks in public markets. After a decade of growing revenue at more than 30% a year, investors rewarded Paycom with price to earnings multiple of nearly 200x.

However, with Paycom’s stock now in a 71% drawdown from its highs, it is one of the worst performing stocks in the S&P 500 over the last 3 years.

So it begs the question, what went wrong? 😬 

1.) BETI cannibalizing its existing business

3 years ago, Paycom launched BETI (short for Better Employee Transaction Interface), and already 65% of Paycom's customers have started utilizing the new product.

However, it has been reported that BETI reduces payroll-related errors for customer by up to 80%. While that's great for customers, it means fewer charges for payroll-related errors for Paycom and customers are often able to reduce their payroll teams which can lead to fewer seats per customer account.

Each of these has been a headwind to Paycom's top-line.

2.) Employment Headwinds

The unemployment rate in the US has now risen for 5 straight months.

Since Paycom prices on a per monthly paycheck basis, hiring slowdowns across the US broadly have a direct impact on Paycom specifically.

This has also forced many analysts to revise their revenue outlook for Paycom over the next 4 quarters.

3.) Competitive Worries

Human Capital Management software is a hyper-competitive market.

CEO Chad Richison even mentioned the increasing competition in a leaked staff meeting from January 2024, when stated:

"We're allowing people to get closer to catching up to us... I mean they haven't because we have BETI and Gone and a Single Database, but if we stand still, they will."

If competition continues to heat up that could lead to a slowdown in the pace of market share growth relative to what Paycom has seen over the last 2 decades.

Conclusion:

Between these 3 headwinds, revenue growth at Paycom has slowed forcing the valuation to drop by a whopping 89% relative to its pandemic highs.

From its current Free Cash Flow Yield of 3.5%, Paycom can likely make for a market-beating investment if they're able to continue stealing market share from legacy payroll software providers and the current headwinds abate.

Recommended Content

7 European Compounders that aren’t talked about enough

1.) Mycronic AB

Mycronic is a swedish conglomerate that sells production equipment for electronics industries. They operate through 4 separate segments: Pattern Generators, High Flex, High Volume, & Global Tech.

• 10-yr Return: 2,911%

• Revenue CAGR: 16.8%

• Market Cap: $3.6 billion

2.) ATOSS Software SE

ATOSS is a german company that develops and sells workforce management software for customers in Germany, Austria, Switzerland, and abroad.

• 10-yr Return: 2,303%

• Revenue CAGR: 14.8%

• Market Cap: $2.5 billion

3.) Vitec Software

Vitec is a swedish acquirer of vertical market software (VMS) companies. Its software caters to specific niches like pharmacies, banks, car workshops, real estate, & education.

• 10-yr Return: 2,009%

• Revenue CAGR: 20%

• Market Cap: $1.98 billion

4.) Nemetschek SE

Nemetschek is a german company that provides software for the AEC industries across 4 segments: Design, Build, Manage, and Media & Entertainment.

• 10-yr Return: 1,553%

• Revenue CAGR: 15.9%

• Market Cap: $11.6 billion

5.) Kongsberg Gruppen ASA

Kongsburg is a Norwegian company that provides high-tech systems and solutions primarily to customers in the maritime and defense markets.

• 10-yr Return: 1,171%

• Revenue CAGR: 9.6%

• Market Cap: $18.4 billion

6.) Robertet SA

Robertet is a french company that produces and sells perfumes and aromas globally.

• 10-yr Return: 455.6%

• Revenue CAGR: 5.6%

• Market Cap: $1.9 billion

7.) Hexagon AB

Hexagon is a swedish company that offers IT solutions for geospatial and industrial applications worldwide.

• 10-yr Return: 249%

• Revenue CAGR: 8.4%

• Market Cap: $27.4 billion

Meme of the week

On Wednesday of this week, cloud computing giant and the world’s largest company by market cap Microsoft filed a Form 8-K announcing that they’re going to be changing a number of their reporting segments.

While companies often have legitimate reasons to make reporting changes, this adjustment somehow makes the growth in virtually every segment look a little better for Microsoft, especially in its cloud computing business. 🤷