With a daily gain of 6.1% and an Earnings Per Share (EPS) of $7.83, Automatic Data Processing Inc (ADP, Financial) presents an intriguing investment opportunity. This article aims to answer a crucial question: Is ADP's stock fairly valued? To unravel this, we delve into an in-depth valuation analysis. Read on to discover more about this intriguing financial journey.
A Brief Overview of Automatic Data Processing (ADP, Financial)
Founded in 1949, Automatic Data Processing Inc is a reputable provider of payroll and human capital management solutions. Catering to a broad spectrum of businesses, from micro to global enterprises, ADP primarily serves over 1 million clients in the United States. The company's employer services segment offers a range of services, including payroll, human capital management (HCM) solutions, human resources outsourcing, insurance, and retirement services. Its smaller, yet faster-growing professional employer organization segment provides HR outsourcing solutions to small and midsize businesses through a co-employment model.
As of July 26, 2023, ADP's stock price stands at $255.15, slightly above its fair value (GF Value) of $253.52. This comparison between the stock price and the GF Value forms the basis for a deeper exploration of the company's value.
Understanding the GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, calculated based on historical trading multiples, a GuruFocus adjustment factor derived from the company's past performance and growth, and future business performance estimates. The GF Value Line provides an indication of the stock's ideal fair trading value.
If a stock's price significantly exceeds the GF Value Line, it is considered overvalued, and its future return is likely to be poor. Conversely, if the stock's price is considerably below the GF Value Line, its future return will likely be higher.
Automatic Data Processing (ADP, Financial) stock appears to be fairly valued based on the GuruFocus Value calculation. With a market cap of $105.4 billion at the current price of $255.15 per share, the stock's long-term return is likely to be close to the rate of its business growth.
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Evaluating Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it's crucial to review a company's financial strength before buying its shares. Automatic Data Processing's cash-to-debt ratio is 0.55, ranking lower than 60.7% of companies in the Business Services industry. Based on this, GuruFocus ranks ADP's financial strength as 6 out of 10, indicating a fair balance sheet.
Profitability and Growth
Companies that consistently display profitability over the long term offer less risk for investors. Higher profit margins often herald a better investment compared to a company with lower profit margins. Over the past ten years, Automatic Data Processing has remained profitable. In the past twelve months, the company generated a revenue of $17 billion and an EPS of $7.83. Its operating margin is 21.2%, ranking better than 86.71% of companies in the Business Services industry. Overall, GuruFocus ranks ADP's profitability as 9 out of 10, indicating strong profitability.
Growth is a crucial factor in a company's valuation. If a company's business is growing, it usually creates value for its shareholders, especially if the growth is profitable. Conversely, if a company's revenue and earnings are declining, the value of the company will decrease. ADP's 3-year average revenue growth rate is better than 60.1% of companies in the Business Services industry. However, its 3-year average EBITDA growth rate is 8.9%, ranking lower than 51.14% of companies in the same industry.
ROIC vs WACC
A useful method of determining a company's profitability is comparing its return on invested capital (ROIC) to the weighted average cost of capital (WACC). ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, ADP's ROIC is 4.95, and its cost of capital is 8.52.
Conclusion
In conclusion, Automatic Data Processing's stock appears to be fairly valued. The company's financial condition is fair, and its profitability is strong. However, its growth ranks lower than 51.14% of companies in the Business Services industry. For more insights into ADP's stock, check out its 30-Year Financials here.
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