ADP Stock Is Supported By Robust Fundamentals

by Trefis Team
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The shares of ADP (NASDAQ: ADP) have gained 33% in the past two months – nearly recovering to the pre-crisis level. The recent surge in ADP stock was driven by strong first quarter results released last month and a revision of full year guidance. The company expects revenues to remain relatively flat and the adjusted operating margin to shrink by just 100 bps. Trefis highlights the key factors that drove 47% Growth In Automatic Data Processing Stock Between 2018 And Now? in an interactive dashboard analysis and we elaborate more on the company’s strong business fundamentals in this article.

Average worksite employees have grown by 6.5% since FY2018

ADP offers cloud-based human capital management (HCM) solutions including payroll processing, talent management, and employee benefits functions to employers of all types and scales. The company classifies its services across two segments, Employer Services and Professional Employer Organization. While the Employer Services segment provides technology-based human capital management services such as payroll, workforce management, benefits administration, etc., the PEO segment provides a comprehensive employment administration solution where employees working for a client are co-employed by ADP and the client (worksite employees).

Since FY2018, Employer Services and PEO segment’s revenues have grown by 6% and 18%, respectively.  The pays per control metric, which measures the number of employees on client payrolls, and the number of worksite employees have been rising in the past three years. Despite a 3% drop in pays per control and a 1% increase in average worksite employees, the company expects revenues to remain relatively flat in FY2021.

Higher segment margins resulting in improving P/E multiple

In FY2020, Employer Services segment contributed 70% of the total revenues and reported a net margin of 30.4%. The three-percentage point improvement in the E.S. segment’s margins has resulted in an overall expansion of the company’s net margin from 14.1% in FY2018 to 16.9% in FY2020. Thus, the 34% growth in EPS coupled with lower shares outstanding has led to continuous growth in the P/E multiple. Considering the latest guidance of just 3-5% drop in FY2021 EPS and the recent rally, ADP stock looks fairly priced.

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