ADP’s Future Growth is Expected To Be Boosted By Its PEO Services

by Trefis Team
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ADP (NASDAQ:ADP) has been growing impressively over the last few quarters. In fiscal 2017 (fiscal year ends in June), the company performed in line with guidance and market expectations and the trend continued in the first fiscal quarter of 2018 as well. The main driver for its healthy top line growth were its PEO (Professional Employer Organization)  services, the division which has witnessed a consistent growth of around 12%-13% in each of the last few years. While ADP’s PEO services business has driven much of the top line growth, payroll processing continues to be its core business, contributing to the largest portion of its revenues. ADP’s comprehensive scope of services – including health and welfare benefits services, compliance services, 401k retirement savings plans, and worker insurance services for small and medium enterprises – has helped its HR Outsourcing & Services division grow rapidly. We have a price estimate of $108 per share for ADP, which is around 10% below the current stock price.

Acquisition Of Global Cash Card Led To An Upward Revision Of Its Guidance For Fiscal 2018

ADP acquired Global Cash Card toward the end of 2017. Global Cash Cards offers pay cards and other electronic payment accounts, thereby allowing employers the option to pay their employees with cards instead of paper paychecks or electronic deposits. This acquisition, along with some foreign currency translation adjustment, has led to an improved overall outlook for the company. Hence, the management has revised its forecasts for 2018 upward. Going forward, ADP expects its revenues to grow at a steady rate of 6%-8%, and its adjusted diluted EPS to improve by 5%-7% for the full fiscal 2018.

PEO Services Expected To Continue Driving Growth

ADP’s PEO Services business has been expanding rapidly over the last few years as more employers are exploring the option of using HR outsourcing. The contribution of HR Outsourcing and Services to the company’s top line  has increased from 18% in 2011 to 28% in 2017. In Q1 FY 2018, the company’s average work site employees grew by 10% to 484,000 employees resulting in its PEO Services revenues growing  by 14% to $899 million. The growth in revenues for this segment was boosted by the rise in worksite employees and the accelerated growth in the healthcare renewal premiums. The management expects the revenues from this segment to hover between 11% to 13% for the full fiscal 2018.

ADP’s revenue from its PEO services have grown at around 14.5% annually over the last five years. As the popularity among businesses to outsource their HR services keep rising, this figure might grow even further in the future. The global market for HR outsourcing is estimated to expand at a compound annual growth rate (CAGR) of around 12.7% between 2016 and 2020 and that will provide a major boost to ADP’s PEO services growth.

One of the important drivers for the growth in ADP’s client base has been brought about by the implementation of the Affordable Care Act (ACA). The adoption of ADP’s products has been increasing significantly post the Act, especially since larger employers  (+1,000 employees) find it easier to outsource the job to a third party who can help them implement ACA solutions for their employees. Consequently, the significant growth in the rise of demand for its PEO services has led to a 9% annual rise in its worksite employees over the last couple of years.

 

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