The stock of Automatic Data Processing (NAS:ADP, 30-year Financials) is estimated to be modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $188.575 per share and the market cap of $80.7 billion, Automatic Data Processing stock gives every indication of being modestly overvalued. GF Value for Automatic Data Processing is shown in the chart below.
Because Automatic Data Processing is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 7.1% over the past three years and is estimated to grow 3.58% annually over the next three to five years.
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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Automatic Data Processing has a cash-to-debt ratio of 0.68, which is in the middle range of the companies in Business Services industry. GuruFocus ranks the overall financial strength of Automatic Data Processing at 6 out of 10, which indicates that the financial strength of Automatic Data Processing is fair. This is the debt and cash of Automatic Data Processing over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Automatic Data Processing has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $14.6 billion and earnings of $5.77 a share. Its operating margin of 21.72% better than 91% of the companies in Business Services industry. Overall, GuruFocus ranks Automatic Data Processing's profitability as fair. This is the revenue and net income of Automatic Data Processing over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Automatic Data Processing is 7.1%, which ranks in the middle range of the companies in Business Services industry. The 3-year average EBITDA growth rate is 9.2%, which ranks in the middle range of the companies in Business Services industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Automatic Data Processing's ROIC is 6.08 while its WACC came in at 5.75. The historical ROIC vs WACC comparison of Automatic Data Processing is shown below:
In conclusion, the stock of Automatic Data Processing (NAS:ADP, 30-year Financials) gives every indication of being modestly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks in the middle range of the companies in Business Services industry. To learn more about Automatic Data Processing stock, you can check out its 30-year Financials here.
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