Why Is The Market Rewarding ADP Stock?

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ADP: Automatic Data Processing logo
ADP
Automatic Data Processing

The shares of Automatic Data Processing (NASDAQ: ADP) have observed investor optimism despite concerns of high inflation and macroeconomic shocks from the Russia-Ukraine war. ADP is the leading provider of cloud-based human capital management and human resource outsourcing solutions in the U.S. After reporting strong fiscal 2021 results, the company continued to raise revenue and margin guidance figures for FY2022. With 14% growth in new business bookings and worksite employees, ADP’s revenues are likely to expand by 9-10% in fiscal 2022. Per an investor presentation, the company currently has a 10% share of the total addressable market and has been consistently gaining market share by outpacing overall market growth figures in recent years.

How has ADP performed in recent years?

ADP’s two reportable segments, Employer Services and PEO Services, account for 70% and 30% of total revenues, respectively. The Employer Services segment provides human capital management products such as payroll services, benefits administration, talent management, insurance services, and retirement services. The PEO (professional employer organization) segment provides a comprehensive suite of HR services where an employee working for a client is co-employed by ADP (known as a worksite employee).

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Before the pandemic, ADP’s revenues observed an average growth of 7% p.a. from $11.6 billion in FY2016 to $14.2 billion in FY2019. During the period, the Employer Services and PEO Services segments reported average annual growth of 3% and 11%, respectively. Notably, the Employer Services’ new business bookings and PEO segment’s average worksite employees increased by $1.7 billion and 10% p.a. With a 21% contraction in new business bookings, ADP’s topline remained almost flat in FY2020. However, the decline in unemployment figures across industries renewed the demand for HCM solutions in FY2021. Thus, ADP’s revenues gained the pre-pandemic pace in FY2022.

Stock Has Moved In Sync With Broader Markets

ADP stock declined from levels of around $181 in February 2020 (pre-crisis peak) to levels of around $112 in March 2020 (as the markets bottomed out), implying ADP stock lost 38% from its approximate pre-crisis peak. It observed a strong rally post the broader market sell-off and has reached $219 at present – nearly 20% above the pre-pandemic levels. In comparison, the S&P 500 Index first fell 34% as lockdowns were imposed in many countries and currently is almost 22% above February 2020 levels. (related: Is Paycom Stock A Good Pick To Realize Long-Term Gains?)

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Returns May 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 ADP Return 1% -11% 113%
 S&P 500 Return 1% -13% 86%
 Trefis Multi-Strategy Portfolio 0% -17% 228%

[1] Month-to-date and year-to-date as of 5/3/2022
[2] Cumulative total returns since the end of 2016

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