Automatic Data Processing Inc (ADP, Financial) has recently experienced a daily loss of 1.4% and a 3-month decline of 3.49% in its stock value, with an Earnings Per Share (EPS) of 8.41. Investors may wonder if this presents a buying opportunity or if caution is warranted. The crux of the matter lies in whether the stock is modestly undervalued, and this article intends to explore Automatic Data Processing's valuation in depth. Read on for a detailed analysis of the factors that contribute to the current valuation of ADP.
Company Introduction
Automatic Data Processing Inc (ADP, Financial) is a leading provider of payroll and human capital management solutions. Founded in 1949, ADP services a vast range of clients from small businesses to global enterprises. The company's offerings span payroll services, human capital management, human resources outsourcing, as well as insurance and retirement services. The smaller, yet rapidly growing professional employer organization segment delivers HR outsourcing solutions through a co-employment model. With a market cap of $94.20 billion and sales of $17.40 billion, ADP's financial footprint is significant. The company's stock price currently stands at $228.99, which warrants a comparison with the GF Value, an estimated fair value, to determine if the stock is trading at a fair price.
Summarize GF Value
The GF Value is a proprietary measure calculated to estimate the intrinsic value of a stock. It incorporates historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line indicates the stock's ideal trading value. When a stock's price is significantly above this line, it is considered overvalued and may yield poorer future returns. Conversely, if the price is below the line, the stock may offer higher future returns.
At a price of $228.99 per share and a market cap of $94.20 billion, Automatic Data Processing appears to be modestly undervalued according to the GF Value. This suggests that the stock may provide a higher long-term return than its business growth alone would indicate.
Link: These companies may deliver higher future returns at reduced risk.
Financial Strength
Investors must assess a company's financial strength to avoid the risk of permanent capital loss. Key indicators such as the cash-to-debt ratio and interest coverage provide insight into a company's financial robustness. Automatic Data Processing has a cash-to-debt ratio of 0.43, ranking below 63.78% of its peers in the Business Services industry. With a financial strength rating of 6 out of 10, ADP's financial condition is fair.
Profitability and Growth
A company's profitability is a critical indicator of its risk profile and performance potential. Automatic Data Processing has sustained profitability over the past decade, with impressive revenues of $17.40 billion and Earnings Per Share (EPS) of $8.41 in the last 12 months. Its operating margin of 21.39% outperforms 87.27% of the companies in the Business Services industry, indicating strong profitability.
Growth is also a vital component of valuation. Automatic Data Processing's average annual revenue growth rate is 8.4%, which fares well against 60.96% of companies in its industry. The 3-year average EBITDA growth rate of 13.1% is better than 55.97% of the companies in the Business Services sector.
ROIC vs WACC
Comparing the Return on Invested Capital (ROIC) with the Weighted Average Cost of Capital (WACC) provides further insight into profitability. Ideally, the ROIC should be higher than the WACC. For the past 12 months, ADP's ROIC is 5.85, while its WACC is 9.77, indicating a potential area for improvement.
Conclusion
In summary, Automatic Data Processing's stock appears modestly undervalued, which may signal an attractive investment opportunity. The company's financial condition is fair, while its profitability and growth prospects are strong. For a more detailed financial history of ADP, interested investors can review the 30-Year Financials here.
Discover High-Quality Investments
To explore high-quality companies that may deliver above-average returns, visit the GuruFocus High Quality Low Capex Screener.
This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
