ADP Heads To $60 From Recovery Economy

ADP: Automatic Data Processing logo
Automatic Data Processing

ADP (NYSE:ADP) announced fourth quarter earnings on Wednesday reporting annual organic revenue growth of 4%. Earnings before income taxes increased 11% and diluted EPS grew 10% year-year-over. ADP provides payroll processing services for businesses of various sizes and competes primarily with Paychex (NASDAQ: PAYX). [1]

See our full analysis on ADP

Employer Services Drive Growth

According to our estimates ADP’s payroll processing services make up approximately 75% of the companies’ value. During the quarter the segment posted 7% revenue and 9% pre-tax earnings growth year-over-year. The primary driver of the increase was a 3.2% increase in the number of employees on client payrolls.

We think that the growth in the average number of employees per payroll client is an encouraging sign for the company because it shows that even in a tough economic environment, ADP’s clients are continuing to grow their workforce. We currently expect that the average number of employees per payroll account will increase to 180 by the end of our forecast period, but if this trend strengthens we could see upside to ADP’s value. You can assess the impact that changes in the average number of employees per major payroll account will have on ADP’s value by using our tool below:

Employment Growth Key for FY 2013

The company, in its FY 2013 forecasts, stated that it does not expect the any changes in the economic environment. According to its report, employment growth in the private sector slowed to 163,000 jobs during the month of July. [2] The Federal Open Market Committee, in its latest policy statement stated, “strains in the global financial markets continue to pose significant downside risks to their economic outlook [of moderate growth]”. [3]

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If these risks materialize, the worsening economy would be expected to slow job growth, which would have downside impact to our Trefis price estimate. For example, an increase in small business bankruptcies would probably have a negative impact ADP’s small business client base. You can assess the impact that a decrease in the number of small business clients would have on ADP’s value by using our tool below:

We currently have a $60 price estimate for ADP, which is approximately 5% above the current market price.

  1. ADP SEC Filings, SEC []
  2. ADP Employment Report, ADP []
  3. Press Release, Federal Reserve []