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Who Are Automatic Data Processing?

The company is a provider of human resources management software and services. ADP offers a wide range of HR solutions, including payroll, benefits administration, time and attendance, workforce management, and talent management. They also offer a variety of cloud-based solutions that allow businesses to manage their HR processes more efficiently.

Scoreboard

The Bull Case

1. Growth

ADP’s income statement and balance sheet are exactly what I look for in a potential buy.

In the last ten years, revenue has grown on average by 6.42%; while net profits have come out at AV 8.85%. I see no reason why this trend can’t continue; as ADP continue to develop services, enter new markets, and capitalize on the new digital age of hybrid working.

2. Retention Rate

ADP had a 92.1% customer retention rate last year. This shows me one of two things. Either the company is providing an exceptional service that customers feel is worth the price; or that one integrated businesses will find it time consuming and costly to shift HR management system.

Both are probably at work – and both are great news for potential investors.

3. A Growing Market

The Human Capital Management (HCM) market is a collection of HR systems, tools, and practices used to recruit, attract, develop, train, retain, and manage employees to achieve business goals.

It is a growing market – and it’s growing fast.

Fortune business insights estimates the market will see a compounded annual growth rate of 9.2% over the next ten years – taking the total value from $27 billion to an astounding $53.

If ADP can capitalise on this trend, which I believe it can, then surely I’m onto a winner.

The Bear Case

1. Rising Debt, Shrinking Cash

Historically, ADP has had an incredible track record in terms of company debt, but there’s been a steady increase in recent years that’s making me nervous.

In 2018, ADP’s debt to equity ratio sat at just over 50%; whereas today it’s at 80%.

The company’s cash and  cash equivalents has dropped from 2.1 billion to just 1.4 as of last annual report.

In no small part are each of these factors influenced by ADP’s dividend payments. $1.65 billion was paid out last year, and by the company’s investment in buying back shares.

Neither of these are necessarily bad – in fact, they are quite positive in most circumstances – but here I’m concerned that that money wouldn’t be better spent elsewhere; especially in paying off debt.

2. Valuation

The above statistics look a little doom and gloom; but I’ve still rated this stock 4/5 stars – because the fundamentals are mostly all in order – and I like the business model.

In fact, I would invest in this stock today, if it was just a little bit cheaper.

Now the DFC calculation comes well under the current stock price, but here I’d rather take a slightly different approach and focus on the P/E ratio – sitting at 28 at the time of writing.

28 actually may be about right, in my view, given the industry ADP operates in (and growth potential).

However, as an investor I’m not looking for “about right”. I’m looking for a bargain, and a margin of safety to boot.

I’ll be looking for the stock price to drop down another 5-10% in the coming months; and looking closely at the 2023 annual report which will be posted at the end of the month, before I invest in ADP.

Final Thoughts…

Additional Notes

•Overwhelmingly, analysts rate ADP a hold.

•Wisely segment of business particularly interesting; offering faster access to pay for hours worked; and connecting pay with digital wallets.

•Regulatory changes could have a high impact on the business.

•Cyber security is also a risk due to ADP’s vas sensitive data handling.

Conclusion

ADP is a company I’d like to own. They are a company who demonstrate clearly they know what they’re doing, in terms of generating revenue and profits, and are well placed to meet increased demand for its sector’s increasing market.

There are financial concerns, however, that have made me press pause on buying shares. Most notably the company’s increased levels of debt and decreased bundles of cash.

The evaluation is therefore a little to high for my liking, but I’ll be watching closely in the coming weeks.