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Automatic Data Processing reported strong new business bookings growth figures for FY2021 assisted by improving employment numbers and declining coronavirus cases.
Per Bureau of Labor Statistics (BLS) report, 850,000 jobs were added in June 2021, but the unemployment rate remained fairly stable at 5.9%. In April 2020, the unemployment rate reached 14.7% with 20.5 million job losses. Given the ongoing vaccination drive and re-opening of the economy, re-hiring in the hospitality sector is a boon for payroll processing firms.
The fourth-quarter revenues and earnings grew by 11% (y-o-y) and 30% (y-o-y), respectively. However, Trefis believes that the recent uptick in Covid-19 cases due to new variants is likely to remain a drag on ADP’s financials in FY2022.
The company is in a good position to support investor returns (dividends & share repurchases).
Below are key drivers of ADP's value that present opportunities for upside or downside to the current Trefis price estimate for ADP:
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.
The number of payroll accounts managed by ADP is an important driver of ADP's revenues. As on June 30, 2019, ADP had more than 810,000 payroll clients.
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.
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 August 2019, the unemployment rate remained at 3.7%, a multi-year low. (Link) Declining unemployment rates are beneficial to ADP since it will have a positive impact on its revenue and number of clients.
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, the Fed ended its Quantitative Easing program in October 2014. Subsequently, Fed raised interest rates in December 2015 for the first time since 2006. Further, the Fed raised its interest rates by 75 basis points in 2017 and by 100 basis points in 2018. However, the Fed reduced interest rate by 50 basis points in 2019 in a bid to boost economy.
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.