Put Your Future Paychex Into ADP Instead!

by Trefis Team
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The stock price for ADP (NASDAQ: ADP) is up roughly 9% since the beginning of 2019. In comparison, Paychex (NASDAQ :PAYX) has seen its stock grow by 19% during the same period. The difference in the stock price growth only makes sense when we look at the growth in revenue, where ADP’s revenue has risen from $13.27 billion in 2018 to $14.59 billion in 2020, and Paychex’s revenue has grown from $3.15 billion to $3.77 billion over the same period, nearly 2x more growth than that for ADP.

Apart from that, ADP’s net margins grew 4x more than Paychex’s net margins. ADP’s margins went from 14.2% in 2018 to 16.9% in 2020 (a 19% rise), whereas Paychex’s margins rose from 26.2% to 27.4% over the same period (a 4.5% rise). Further, Paychex’s price-to-earnings (P/E) multiple rose from 22x in 2018 to 26x currently, while ADP’s multiple is unchanged at 24x over the same period. Does that make sense? We don’t think it does, and we believe ADP is a good investment at the moment compared to Paychex. Our dashboard, ADP’s Stock Price Change Of 8.6% vs. 19.3% For Paychex Since Early 2019 Doesn’t Make Sense, has the underlying numbers.

ADP’s Revenues are almost 4x that of Paychex’s

Let’s look at both companies a little more closely. ADP and Paychex are both HR and payroll processing companies, who handle the payroll processing needs for enterprises. ADP mainly caters to larger companies, while most of Paychex’s clients are small to medium level enterprises. Both companies have seen steady revenue growth since 2018, but Paychex has outpaced ADP in this department. ADP’s revenues grew from $13.27 billion in 2018 to $14.59 billion in 2020, while Paychex revenues grew 2x faster from $3.15 billion to $3.77 billion over the same period.

However, ADP’s net margins have seen strong growth rising from 14.2% in 2018 to 16.9% in 2020, 4x faster than Paychex’s margins, which grew from 26.2% to 27.4% over the same period. ADP’s cost-cutting initiatives have helped the company achieve this growth and the trend is expected to continue going forward. Paychex saw margins rise from 26.2% in 2018 to 29.4% in 2019, but drop back to 27.4% in 2020 due to a rise in operating expenses.

We believe ADP’s business looks more attractive compared to Paychex, at current valuations. ADP trades at a 24x P/E multiple, compared to Paychex’s stock trading at almost 26x. ADP’s P/E has stagnated at 2018 levels, and given its stellar margin growth we believe its business looks much more attractive compared to Paychex.

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