Human resource management expert Automatic Data Processing (ADP, Financial) witnessed its fair share of ups and downs during the Covid-19 pandemic. The company experienced a slowdown as enterprises cut employment during the crisis phase. However, with the economic recovery, Automatic Data Processing managed to show a low-single-digit growth in the top-line recently.
It has also added many new books, particularly in its Employer Services segment, despite strong competition from the likes of Paychex (PAYX, Financial) and Workday (WDAY, Financial). The company has managed to thrive and grow in these tough times.
However, Automatic Data Processing's stock has witnessed a runup in 2021. Is its current valuation justified? Let's take a look.
Recent financial performance
The company recently reported revenue of $4.10 billion for its third quarter of fiscal 2021, representing 1.34% growth as compared to the $4.05 billion in revenue reported in the corresponding quarter of the 2020 fiscal year. This beat the analyst consensus estimate of $4.08 billion.
These revenues translated into a gross margin of 46.90% and an operating margin of 26.24%, which was lower than the prior-year quarter.
Automatic Data Processing reported net income of $810.7 million and adjusted earnings per share (EPS) of $1.89, which was above the average Wall Street expectation of $1.79.
In terms of cash flows, the company generated $1.25 billion in the form of operating cash flows and spent $1.42 billion in investing activities during the quarter, which left the management with negative free cash flow.
Recent developments
Automatic Data Processing is known to offer cloud-based human resource management solutions, including payroll processing, talent management and employee benefits functions.
In February 2021, the company announced the launch of Roll, a new payroll and tax filing product for small businesses. The primary job of Roll is to combine the simplicity of an AI-driven chat-based interface with the power and scale of Automatic Data Processing's payroll and tax filing expertise. Since the target clients for Roll users are those with simpler needs who prioritize a mobile-first fully chat-based interface, the management believes that this offering will help to expand its reach into the U.S. small business market beyond the businesses that were historically targeted with RUN, another software platform powered by the company.
Apart from this, Automatic Data Processing is also focused on increasing the amount of digital onboarding with RUN, and this quarter alone saw 15,000 RUN clients on-boarding themselves digitally.
Moreover, the company's Next-Gen Payroll engine also continues to scale up in the mid-market segment. In this quarter, Automatic Data Processing also continued to expand its capacity and appears to be set to accommodate more complex payroll needs. The company's client count reached a whopping 900,000, which is definitely a big achievement.
ADP DataCloud
ADP DataCloud provides clients with employee information and analytics and applies various tools like data science and artificial intelligence to provide detailed insights and trends. The company is focused on expanding the scope of its core people analytics solution, the ADP DataCloud, by adding new tools that can help businesses analyze their diversity and better allocate their staff resources.
In April 2021, Automatic Data Processing launched the new ADP Diversity, Equity and Inclusion (DEI) Dashboard and Organizational Benchmarks Dashboard. As per the management, these new capabilities enable organizations to answer common business questions that were either difficult to cater to or required custom analytics projects. These questions, involving diversity and organizational comparisons to other companies, represent some of the most prominent workplace issues of today. The new DEI dashboard helps the company's clients get an instant yet comprehensive view of their workforce, elevating the supplemental data to analyze and help address various organizational needs. Its Organisational Benchmarks Dashboard helps to compare organizational metrics like headcount, labor costs and turnover against other similar businesses. Overall, these product enhancements are all designed to drive growth and help the company retain customers and win new business.
Valuation
According to the GuruFocus value chart, Automatic Data Processing is modestly overvalued at the current levels, and I am in agreement with this indicator. The company is trading at an enterprise-value-to-revenue multiple of 5.67, which appears to be on the higher side of the median range for the outsourcing industry. In addition, if we look at the price-book ratio of 14.61 and price-sales ratio of 5.69, both these indicators are extremely high, and it indicates that there is limited scope for multiples expansion in the future.
While the company does have an interesting set of recent developments, I don't consider any of them as significant drivers that could really propel the stock. In my opinion, investors should keep Automatic Data Processing on their watchlists and monitor the future results and updates closely before considering an investment in the stock.
Disclosure: No positions.
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
