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Investment Overview for ADP (NASDAQ:ADP)
Below are key drivers of ADP's value that present opportunities for upside or downside to the current Trefis price estimate for ADP:
- Number of Clients Served:
We currently forecast the number of clients served by ADP's Payroll Processing division to increase going forward from 564K in 2012 to ~693K by the end of the Trefis forecast period. Increase in clientele is likely to occur because of improving economic conditions and ADP's efforts in acquiring clients through acquisitions and overseas expansion. However, there could be a 4-5% downside to the Trefis price estimate if ADP's clients grow to only 620K or lower.
- Payroll Processing EBITDA Margin : Historically, the EBITDA margin for ADP's payroll processing business has decreased from ~21% in 2009 to ~19% in 2012. However, we forecast the EBITDA margin to increase to ~20% by the end of the Trefis forecast period, on account of ADP's ability to obtain sustained price increases from its clientele, coupled with improved operational efficiency. There could be a 5% upside to the Trefis price estimate if ADP's payroll processing EBITDA margin increases to 22% by the end of the forecast period.
Client Funds Interest
- Average Interest Rate: Due to the U.S. Federal Reserve Bank's quantitative easing, Average Interest Rate for ADP has fallen from ~3.7% in 2009 to ~2.5% in 2012. However, on the assumption that the Fed will gradually taper down its QE bond buying program, we forecast ADP's Average Interest Rate to increase to ~4.3% by the end of our forecast period. However, there could be a 10% downside to our price estimate if ADP's Average Interest Rate falls to 2%.
For additional details, select a driver above or select a division from the interactive Trefis split for ADP at the top of the page.
ADP offers payroll processing to businesses of varying sizes around the globe. Payroll processing includes the paper and electronic distribution of employee compensation along with the processing of tax withholdings and other employee contributions. Businesses save time and resources by outsourcing their payroll processing needs to companies like ADP.
Number of Payroll Accounts
The number of payroll accounts managed by ADP is an important driver of ADP's revenues. ADP has more than 550,000 payroll clients and approximately 26,000 auto dealer accounts for its auto dealer services.
Account Types and Fee Per Client
The company divides its US payroll business into three segments based on the number of employees in an account: National Accounts (1000+ employees), Major Accounts (50-999 employees) and Small Business Accounts (<50 employees). The Fee Per Client is an important metric as it shows how ADP's pricing power and the competitive scenario translate into fee per client for ADP.
Declining unemployment rates in the U.S.
During the recession, unemployment rates in the U.S. had increased drastically as many businesses laid off employees to reduce costs. The U.S. unemployment rate peaked at 10% in October 2009. However, driven by recovery in the U.S. economy, businesses have began hiring again. Post October 2009, the unemployment rate has been declining month-on-month. In May 2014, the unemployment rate stood at 6.3%. Declining unemployment rates are beneficial to ADP since it will have a positive impact on its revenue and number of clients.
Low interest rate environment may change
Interest rates in the U.S. have been low due to the Quantitative Easing program undertaken by the government in order to promote growth in the economy. As the U.S. economy started registering sustained growth since the financial crises of 2008-09, the Fed has started to taper its Quantitative Easing program. Once the program ends in late 2014, the Fed may begin to increase rates in 2015. (Link)
Complexities in the Affordable Care Act will force businesses to take advise from professionals
The recently introduced Affordable Care Act in the U.S. has certain complexities that will force businesses to take advice from professionals. ADP has proactively taken steps and has begun to offer solution that will help clients navigate through these complexities. As more businesses look for such solutions, ADP's clients will increase.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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