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Investment Overview for ADP (NASDAQ:ADP)
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Below are key drivers of ADP's value that present opportunities for upside or downside to the current Trefis price estimate for ADP:
Payroll Processing
- 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 66K in 2012 to ~75K by the end of the Trefis forecast period. However, there could be a 4-5% downside to the Trefis price estimate if ADP's major payroll accounts decline in the future as ADP continues to witness weakness in new sales for major accounts.
- ADP Payroll Processing Pre Tax Profit: Historically, the the pre tax margin for ADP's payroll processing business have increased consistently from 21.6% in 2005 to 22.9% in 2012 as revenue growth outpaced the increase in costs for the division. We forecast the margin will increase further in 2012 to ~slowly increase going forward to approximately 30% by the end of our forecast period. . There could be 10% upside to the Trefis price estimate if ADP's payroll processing pre tax margin continue to increase in the future reaching 34% by the end of our forecast period.
For additional details, select a driver above or select a division from the interactive Trefis split for ADP at the top of the page.
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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.
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Number of Payroll Accounts
The number of payroll accounts managed by ADP is an important driver of ADP's revenues. ADP has more than 500,000 payroll clients and approximately 25,000 auto dealer accounts for its auto dealer services.
Account Types and Employees per Account
The company divides its US payroll business into three segments based on the number of employees in an account: National Accounts (500+ employees), Major Accounts (50-499 employees) and Small Business Accounts (<50 employees). The average number of employees per payroll account is important since ADP charges a payroll processing fee for each employee served.
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Large International Opportunity
We believe that international payroll processing remains a large opportunity for ADP. Only $1.4 billion of the $6.4 billion earned by ADP through payroll processing fees in FY 2010 came from international sources.
Limited Small Business Exposure
Small businesses are the most vulnerable to changes in economic conditions and have high bankruptcy risk. Although ADP serves small business customers, it is less exposed to the risks of small businesses than its primary competitor, Paychex.
Trefis Forecast Rationale for Number of ADP Small Business Payroll Clients
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The ${forecast} is the number of payroll processing clients with fewer than 50 employees.
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The ${forecast} increased at an average rate of 4% from 2006 to 2008 before declining in 2009-10 to 3,82,000. It increased slightly to ~400K in 2011. Going forward we expect it to grow steadily and reach ~470K by the end of our forecast period.
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- Decline in new clients driving the net decline
- The net increase in clients every year is a combination of clients retained from previous year and the addition of new clients.
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Scarcity of new startups
- Economic slowdown of 2008-09 has led to fewer new business coming up as it becomes increasingly tough to get funding for business ideas.
Back to Company OverviewHow 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:
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