Automatic Data Processing (ADP)

ADP's stock has basically gone sideways (with a standard deviation) for the last few years. It won't keep doing that, because this is one of the world's largest payroll processors, with an ROIC of about 20%. Their cost of capital is around 9%. Their operating margins are around 20% as well.

As well, their customer retention rate is very high, and they are starting to cross-sell products like 401ks and other employer services. They have a big opportunity in the smaller-business market, but they'd also take on the risk of higher client churn.

Now, in their core payroll business, ADP competes with Paychex (PAYX), a company I've also picked and which I like a bit better. ADP and PAYX are the strongest two companies in their field. I think right now, PAYX is closer to fair value and I wouldn't rush to buy. However, ADP has been going sideways the last few years, and I think now's as good a time as any to buy.

(07/02/27) Automatic Data Processing is a business that helps its customers improve productivity - the key driver in the economy today. ADP is good at what it does, hence he outlook is positive. The balance sheet is pristine - almost no debt. I'm blindly holding 'till at least, ... say, $55, and then I will take another look.

Dominant payroll supplier. Payroll services require trust from the employer and I believe they have a solid moat and brand name (every job I've had ranging from retail to non-profit has used them)

ADP before 9/11 was a stock that would split about every 5 years.

Times are different now, with their Dealer Services Division making up about 15% of the company and the Automotive business struggling don't look for much movement. If they can unload the DS Division just as they did with the underperforming Brokerage Division about 2 years ago I would change my opinion to outperform but I don't see that happening any time soon. Just my opinion...Good Luck!!

Solid company. Great financials. ZERO debt. AAA credit rating. I work for ADP. Much of its revenue comes from money it earns in interest. With the fed likely to raise interest rates in the next quarter or two and with the spin off of its brokerage division, the company should take off!!!

Good pick through at least August. Fiscal year end in July that will slightly exceed the streets expectations. Currently mitigating risk by controlling operating expenses through the second quarter.

Everyone needs their paycheck and ADP is there. Congress will continue to make income taxes more and more complex, thus making companies not want to mess around with payroll functions and want to just contract it out. Plus, the market is in the tank these days (10/9/08) and this stock will bounce back up!!

Financially reserved firm - nothing crazy going on with their books. Old school business that has a chance for good long term growth, provided management keeps making sound decisions about technology and new business lines.

I like their business model. The moat is too wide for others.

Great company with great products.

This should be trading as a best of breed - instead of at a slight discount.

Automatic Data Processing, Inc. (ADP) is a provider of business outsourcing solutions. ADP offers a range of human resources (HR), payroll, tax and benefits administration solutions from a single source. ADP is also a provider of integrated computing solutions to automotive, heavy truck, motorcycle, marine and recreational vehicle dealers worldwide. ADP offers payroll and human resource outsourcing solutions to small and large clients alike in over a dozen countries outside of the United States. In each of Canada and Europe, ADP is a provider of payroll processing (including full departmental outsourcing) and human resource administration services. ADP also offers wage and tax collection and remittance services in Canada, and has developed wage collection and remittance services to be offered in the United Kingdom. 46,000 Employees.

52 Week High 50.30
52 Week Low 37.74
Volume 4.18 Mil
Average Daily Volume (13wk) 1.57 Mil
50 Day Moving Average 39.80
200 Day Moving Average 45.04
Volatility (beta) 0.85

Food price increases should push this stock to new highs. Ethanol is taking a lot of acreage out of food production, one of the reasons for the pressure on prices. The Chinese and Indian expanding economies should be a big plus!

Isn't it true that they have never posted a quarterly loss?? They are also entering the UK market with wage collection service etc ... They also assist with computerize solutions in industries where that knowledge is lacking ...

They are solid and perform year in & year out ... an anchor for solid returns ...

ADP continued their strong performance as a company in their fiscal second quarter of 2008, posting 15% year-over-year revenue growth and 22% earnings growth from continuing operations. In addition, ADP guided to 12-13% revenue growth, and 18-21% diluted earnings per share growth in 2008. The market is certainly not pricing the company as if it expects these targets to be achieved. ADP also continues to pay a $0.29 per share dividend per quarter. That’s over a 3% dividend yield.

Quarterly Highlights

In the first two quarters of 2008, ADP has re-purchased over 18 million shares at a cost of $842 million. I view this as a shareholder friendly practice that drives growth in earnings per share.

ADP’s flagship Employee Services division reported an 11% increase in revenues on a year-over-year basis. Their “beyond payroll” revenues grew at a 16% rate in the US.

ADP had its PEO Services segment grow revenues at a 22% rate. Average worksite employees paid increased to approximately 170,000, representing 20% growth over the prior year.

Dealer Services Revenue grew at a 9.5% rate with margins improving as well. Client Funds revenues grew at a 14% rate to $162 million. This is just interest on float that ADP earns, which will be negatively impacted by lower short-term rates this year. Still, there was an 8.9% increase in average client fund balances.

All segments of ADP’s business look to be performing well. If this rate of growth continues, shares could double in five years.

Trailing-Twelve Month Owner Earnings

ADP’s trailing twelve month numbers are as follows:

(see table here: http://www.poeticportfolios.com/?p=47)

Capital expenditures for the 2nd quarter were not reported. I have estimated capex based on the past three quarters of history.

Valuation

In order to determine an intrinsic value of ADP, I start with owner earnings of $2.19 per share. I then apply a 5-year growth rate, followed by a terminal growth rate for years 6-30 of 5%. I discount the series of cash flows back at 10%.

Using 5-year growth rate of 5%, followed by terminal growth rate of 5% results in a value of $35 per share. This is about as conservative as you can project given the consistency of ADPs performance.

Assuming ADP cannot hit their guidance and only grows at a 12% rate for 5 years, the value is $46 per share. The market seems concerned that unemployment will rise, and stall ADP’s growth. A 12% growth rate assumes that they hit some headwinds, but over the course of the next five years, they continue double-digit earnings per share growth.

Finally, I want to assume that ADP hits their guidance and can maintain strong earnings per share growth due to continued buybacks and growth in their less mature businesses such as PEO services. Here I assume 18% growth for five years and get a value of $59 per share. Keep in mind that ADP generated 22% year-over-year growth in continuing operations per diluted share in their most recent quarter. A 25% margin of safety here still results in a value of $43 per share. This still looks achievable for ADP.

Conclusion

The market certainly seems to be a bit irrational in regard to ADP at this time. It is rare to get a chance to buy this company on sale, so now continues to be a good time to add shares for the long term. Don’t forget the nice 3% dividend yield as well.

Payroll leader will outperform in foreseeable future

A key portion of ADP's earnings is tied to interest rates on floating funds, performance will likely remain low until the Fed begins to raise interest rates.

Until interest rates rise ADP is going to lag the market. Due to its solid balance sheet it has not been beat up as bad as the rest of the world, but it won't gain as quickly as the S&P if/when there's a recovery.

recent increase in dividends is good news

need me some dividends to ride the storm out...