An Upside/Downside Scenario for ADP

+1.03%
Upside
249
Market
252
Trefis
ADP: Automatic Data Processing logo
ADP
Automatic Data Processing

ADP’s (NASDAQ:ADP) most important business division – payroll processing – accounts for roughly 86% of our $62.54 Trefis price estimate for the company’s stock. ADP is a leading payroll processor in the U.S. along with Paychex (NASDAQ:PAYX) and serves many large businesses as well as caters to a sizable number of small businesses (fewer than 50 employees).

Below we take a look at a potential upside and downside scenario for the firm.

8% Upside Scenario — $67.36 Trefis

ADP Payroll Processing Operating Profit

The operating margin for ADP’s payroll processing business has increased from just over 21% in 2005 to near 27% in 2010 as revenue growth outpaced the increase in costs for the division.

We forecast the operating margin will remain constant for the rest of the Trefis forecast period. There could be 7-8% upside to the Trefis price estimate if ADP’s payroll processing operating margins continue to increase in the future reaching 30% by the end of our forecast period.

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4% Downside Scenario — $60.43

Number of ADP Major Payroll Accounts

We currently forecast the number of major payroll processing clients, those with 50 to 500 employees, of ADP will increase going forward from 63,000 in 2010 to almost 69,000 by the end of the Trefis forecast period.

However, there could be 3-4% downside to the Trefis price estimate if ADP’s major payroll accounts decline in the future falling below 60,000 as ADP continues to witness weakness in new sales for major accounts.

See our full analysis for ADP’s stock here