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BR or ADP: Which Outsourcing Stock is Better Positioned?

Zacks

Outsourcing is the practice of handling over the control of certain operations, services or processes (which were previously done by the company’s internal staff and resources) to external resources or third-party contractors. A company may choose to outsource its operations for several reasons such as to reduce and control operating costs, increase focus on its core business competencies, thereby improving efficiency, strengthening its market share and getting access to better external resources. To avoid government rules and regulations, outsourcing is also adopted.

Per a report by statista, the global outsourcing industry generated $88.9 billion in revenues in 2017. The outsourcing trends are expected to be more favorable going ahead in 2018 on a worldwide basis.

Despite multiple tailwinds, outsourcing services have certain disadvantages. Companies need to constantly negotiate terms with their third-party contractors to enjoy easy services. At times, third-party vendors need to access the company’s internal data for proper functioning and this is where the security factor comes in.

Given this backdrop, it is not a bad idea to undertake a comparative analysis of two Outsourcing Services stock — Broadridge Financial Solutions Inc. BR and Automatic Data Processing Inc. ADP. Both the stocks are part of the broader Business Services sector (one of the 16 Zacks sectors). While Broadridge has a market capitalization of $13.71 billion, Automatic Data Processing’s market cap is $61.36 billion.


Zacks Rank & Style Score

Currently, both the stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

However, with an VGM Score of B, Broadridge enjoys an edge over ADP in terms investment attractiveness. ADP has a VGM Score of C. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores.

Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 offer the best investment opportunities for investors. Thus, the company appears to be a compelling investment proposition at the moment.

Price Performance

Broadridge clearly scores over ADP, considering its price performance in a year’s time. Shares of Broadridge have gained 54.6%, outperforming the S&P 500’s and industry’s rally of 13.7% and 25.2%, respectively. ADP has gained 37.6%, underperforming both the S&P 500 Composite and the industry.

Earnings Expectations

Earnings growth along with stock price gains is often an indication of a company’s strong prospects.

ADP’s current-quarter earnings are projected to grow 38.5% compared with 9.9% for Broadridge. However, for full-year 2018, the situation is just the opposite with ADP’s expected earnings growth rate of 16.8% being lower than Broadridge’s growth rate of 34.5%.

For 2019, ADP’s earnings are expected to register 12% growth compared with 6.9% for Broadridge. Moreover, the long-term expected earnings per share growth rate of 11.3% for ADP is higher than Broadridge’s growth rate of 10%.

While Broadridge’s earnings are expected to grow higher than ADP in 2018, the situation is expected to reverse in 2019 and the long term.

Earnings Estimate Revisions

The direction of estimate revisions serves as an important pointer when it comes to the price of a stock. Based on the earnings estimate revisions for the current quarter and full-year 2018 and 2019, in the last 60 days, ADP appears to be more favorably placed.

The Zacks Consensus Estimate for current quarter earnings improved 9.8% for ADP against a decrease of 2.1% for Broadridge.

For 2018, the consensus estimate improved 4.3% for ADP and 4.2% for Broadridge. Estimates for 2019 moved up 3.4% for ADP and 2% for Broadridge.

Earnings Surprise History

The earnings surprise history of a stock helps investors have an idea of the stock’s performance in the previous quarters.

Broadridge and ADP have an impressive earning surprise history, with their earnings surpassing the Zacks Consensus Estimate in three of the previous four quarters.

However, Broadridge enjoys an edge over ADP as it delivered an average positive earnings surprise of 23.6% as against 5.2% for the latter.

Net Margin

Net profit margin helps investors evaluate a company’s business model in terms of pricing policy, cost structure and operating efficiency, and shows how good it is at converting revenues into profits. Hence, a strong net profit margin is preferred by all classes of investors.

With a TTM net margin of 13.6%, ADP not only compares favorably with the industry’s figure of 11.8% but also has a lead over Broadridge’s 9.4% TTM net margin. Broadridge does not compare favorably with the industry in terms of TTM net margin.

Valuation

The Price to Earnings Ratio (P/E) metric is used to measure a company's value relative to its earnings. In general, a lower number or multiple is usually considered better than a higher one.

The trailing 12-month price-to-earnings multiple for Broadridge and ADP is 28.8 and 34.2, respectively, while that of the industry is 28.3. Although both the companies are overvalued relative to the industry, Broadridge has an edge with a lower P/E ratio.

The EV/EBITDA metric is used to compare two stocks within the same industry and offers a clearer picture of a company’s valuation because it includes debt. The ratio is often used in addition to the P/E ratio.

We observe that while Broadridge and ADP have EV/EBITDA ratios of 16.3 and 21.0, respectively, the industry’s figure stands at 13.6. Although both the companies compare unfavorably with the industry, Broadridge is better positioned with a lower EV/EBITDA value.

Though both the stocks look overvalued relative to the industry, Broadridge is undervalued compared to ADP.

ROE and ROC

Return on Equity (ROE) is the measure of a company’s efficiency in utilizing shareholders’ funds. The trailing 12-month ROE for Broadridge and ADP is 45.3% and 45.7%, respectively, while that of the industry is 34.7%. Although both the companies clearly score above the industry, ADP is a better choice than Broadridge with a higher ROE.

Return on Capital (ROC) for Broadridge and ADP is 21.3% and 30.4%, respectively, while the industry’s ROC stands at 22.9%. This implies that ADP generates a higher return on investment than its industry.

Bottom Line

Our comparative analysis shows that Broadridge is superior than ADP when considering price performance, valuation and earnings history. ADP scores over Broadridge in terms of net margin, long-term expected earnings growth, earnings estimate revisions, return on capital and equity.

Other Stocks to Consider

Some other top-ranked stocks in the broader Business Services sector include Mastercard Incorporated MA, FLEETCOR Technologies, Inc. FLT and WEX Inc. WEX. While Mastercard sports a Zacks Rank #1, FLEETCOR Technologies and WEX carry a Zacks Rank #2.

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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