ADP (NASDAQ:ADP) and Paychex (NASDAQ:PAYX) are the leading payroll processors in the US. The stocks of both companies are dependent on employment levels and the overall state of the economy. More than 80% of ADP’s stock value comes from its payroll processing business compared to around 70% for the stock of its competitor Paychex.
ADP caters mainly to large businesses (or national accounts) that have huge volumes of payroll processing requirements owing to a substantial employee base. These companies offer greater stability during recessionary times in comparison to smaller companies. These factors make national payroll accounts crucial for ADP’s business.
Below we discuss the importance of payroll processing to ADP’s stock, and the reasons that make national accounts vital for ADP.
Payroll Processing is 83% of ADP’s stock
We estimate payroll processing to constitute 83% of the $52 Trefis price estimate for ADP’s stock.
Two reasons why national accounts are more important to ADP as compared to major and small business payroll accounts:
1. National accounts have a large employee base
Average number of employees in each national account was 1,800 in 2009 for ADP ompared to 159 for each major account, and 10 employees for each small business account. This implies that loss of one national account is equivalent to loss of 11 major accounts or 180 small business accounts for ADP.
2. Large businesses have greater stability
Large businesses have lower closure rates and are in a better position to sustain themselves during recessionary times compared to small businesses that are very volatile in nature.
In addition, large businesses are more likely to remain a customer of ADP for longer and less likely to switch to a competing payroll provider. The lower churn of large business customers helps ADP by saving it expenses associated with a large sales force for winning large business customers.
Growing National Accounts
ADP’s national accounts have increased steadily over the years, and we expect the total number to reach 5,500 by the end of the Trefis forecast period.
You can modify the forecasts above to see how the number of national accounts and the average employees per national account can impact ADP’s stock price.
For additional forecasts and analysis, here is our complete model for ADP’s stock.
