ADP (NASDAQ:ADP) recently reported that job creation is slowing which could spell a troubling trend for largest payroll process in the U.S.; however recent moves to focus more on small businesses that are creating the most jobs support the company’s outlook. ADP reported the number of jobs created dropped to 114,000 in July from 145,000 in June. In addition, the month of July also saw over 66,000 job cuts according to consulting firm Challenger, Gray & Christmas Inc. ADP competes with Paychex (NASDAQ:PAYX) and start-ups like Workday.
We have recently revised our Trefis price estimate for ADP to $56.65, which is about ~15% above the market price based on the Q4’11 earnings and the firm’s reported forecasts for 2012.
Despite concerns in the job market, we are being bullish on ADP for the following reasons:
1. ADP Focusing on Small Businesses as they Add Most Number of Jobs
According to ADP’s report, small businesses have been increasing hiring for nearly two years now. Companies with fewer than 50 employees added 58,000 jobs nationwide in July while businesses with 50 to 500 workers hired 47,000 people, according to the study. Only 9,000 new positions were at large firms with more than 500 staffers. [1] It is also worth noting that as much as 57% of July’s layoffs come from just five companies, implying that the job scenario at small businesses is actually not bad.
Identifying the increasing importance of small business clients, ADP has been ramping up its service offerings to the segment. With small businesses leading the trend towards increasing mobility, ADP launched its popular payroll management platform for small business on the iPhone as well as Android smartphones. (See ADP Targets Small Business Clients through Android Payroll Platform)
As ADP continues to expand and refine its services to better cater to small businesses, its number of small business clients can be expected to rise in the future.
2. Expanding Non-Payroll Services to Drive Revenue Growth
ADP expects high single digit revenue growth in fiscal year 2012 backed by its solid sales performance and investment in product innovation. Even more encouraging is the fact that the revenues are expected to increase across the segments. In particular, HR outsourcing and other services (technically known as PEO services) revenues are expected to grow by over 15% given ADP’s recent push non-payroll services including human resources, recruiting and talent management, background checks and benefits administration. (See ADP’s Grows Beyond Payrolls)
With more services to offer, the fee that ADP charges per worksite employee can be expected to rise in the future.
Notes:- Job growth slows and layoffs rise to 16-month high, reports say, Los Angeles Times [↩]
