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Automatic Data Processing Hits 52-Week High on Investor Day


Shares of Automatic Data Processing, Inc. ADP hit a 52-week high of $139.45 on Jun 12, the company’s 2018 investor day, before closing a tad lower at $139.30.

The company’s shares have charted a solid trajectory in recent times, appreciating over 46.8% year to date, ahead of the industry’s gain of 2.6%. Notably, the company has witnessed a 14.1% rise in share price since it posted strong third-quarter fiscal 2018 results.

Let’s find out what’s supporting the rally.

Transformation Initiatives

ADP boasts a strong business model, high recurring revenues, good margins, robust client retention and low capital expenditure. The company has a strong pipeline of new business bookings. It continues to innovate, improve operations and invest in its ongoing transformation efforts. As a part of its transformation initiative, ADP has recently launched differentiated "Next Gen" platforms aimed at strengthening its position in HCM innovation, and improving its U.S. up-market and international product suite.

ADP’s other notable and recent transformation-related achievements include accelerated DataCloud penetration, increased investment in inside sales, mid-market migrations, service alignment initiatives and voluntary early retirement program.

On its Investor Day, ADP stated its plans to expand its ongoing transformation through several broad-based initiatives. These include Go-To-Market Initiatives like data-enabled market insights and streamlined support, Service Initiatives encompassing automated service enabler tools and optimized service locations, Product & Portfolio Initiatives including ongoing client upgrades and infrastructure optimization, and Operations & Support Initiatives such as procurement and pay-for-performance programs.

Transformation initiatives are allowing the company to expand margins and improve innovation abilities.

Automatic Data Processing, Inc. Net Income (TTM)

Disciplined Approach Toward Acquisition

Recent acquisitions of WorkMarket, Global Cash Card and The Marcus Buckingham Company has strengthened ADP’s customer base and helped it expand operations in international markets. The company continues to pursue acquisitions that strategically fit its overall business mix and are easy to integrate over the long term.

Increasing Scale and Reach of Distribution

ADP’s wide scale and reach of distribution provides it with a competitive advantage. The company’s HCM sales are improving every year with clients in 113 countries worldwide. Also, ADP is increasing its inside sales organization to capitalize on digital sales. It has a strong partner ecosystem with more than 20,000 partners referring each year.

The ADP market place is one of the world’s largest of its kind, which digitally distributes more than 250 apps. Currently, the company is driving bookings growth through headcount, productivity and innovation.

Strong Balance Sheet

ADP’s strong balance sheet makes the stock attractive for investment in our view. The company had cash and cash equivalents of $2.3 billion as of Mar 31, 2018. ADP continues to use excess cash to aggressively buy back shares and pay out dividends. Continuing with its strategy of returning cash to shareholders, the company paid dividend of $995 million and repurchased stocks worth $1.26 billion during fiscal 2017.

We believe that the strong balance sheet will not only help the company to continue shareholder friendly activities but also pursue strategic acquisitions and investments on product development in the long run. The dividend hike announced by the company in April 2018 highlights ADP's commitment to create value for shareholders and underscores the company’s strong financial position. It also indicates the company’s bright prospects.

Increased and Extended Financial Outlook

ADP raised fiscal 2018 guidance for adjusted earnings and adjusted EBIT margin. Adjusted EBIT margin is anticipated to be more or less flat compared to a decline of almost 50 bps (basis points) projected earlier. Adjusted earnings are envisioned to grow in the range of 16-17%, up from 12-13% guided earlier. However, the company reiterated the outlook for revenue growth in the band of 7-8%.

Additionally, ADP announced extension of its fiscal 2021 outlook on its Investor Day. For fiscal 2019-2021, the company expects adjusted EBIT margin expansion between 300 bps and 500 bps compared with the prior expectation of 200 bps. Revenue growth for the same period is projected in the range of 7-9%. Also, adjusted earnings are expected to grow in the 18-21% band.

Zacks Rank and Other Stocks to Consider

ADP currently carries a Zacks Rank #2 (Buy).Other top-ranked stocks in the broader Business Services sector include Mastercard Inc. MA, FLEETCOR Technologies, Inc. FLT and WEX Inc. WEX. While Mastercard sports a Zacks Rank #1 (Strong Buy), FLEETCOR Technologies and WEX carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

The long-term expected earnings per share growth rate for Mastercard, FLEETCOR Technologies and WEX is 19%, 16.5% and 14.3%, respectively.

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