Automatic Data Processing (ADP) is a world leading provider of human capital management solutions (HR, payroll, talent, time, tax and benefit administration solutions). Company was founded in 1949 year in New Jersey. Company provides solutions to more than 630 000 clients in more than 100 countries.

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Business model is stable due to high costs of changing HCM systems. Most of revenues are from recurring, long term clients.

Topline growth is strictly dependent on global economy. Managements estimates annual long term revenue growth to be around 7-9%. It is a little bit higher than estimates for global HCM market, which is valued at $110b (vs ADP revenues ~$10b).

Company is developing Big Data and Analytics segments – in my opinion this is a right move taking into account scale of operations.

What to expect in future? On NASDAQ 33rd Investor Program company presented following expectations:

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In my opinion it is not too much, but enough for stable business.

 

As it comes to financials (estimates):

Market cap ~ $36B

Net debt ~$0B

Payout ratio ~65%

ROE ~27.1%

Beta = 0.9

Dividend yield 2.6% + debt-funded buyback around $2b

 

In fact I do not like buying back shares at all time high – especially if it is debt funded program. I think buybacks work best when share price is depressed after e.g. weak quarterly results etc. See ADM, WMT etc. I believe such buybacks create the highest long term value.

 

Estimated valuation ratios:

EV/EBITDA = 14

P/E = 25

Fiscal year ends at 30 June.

 

ADP is one of The Dividend Aristocrats paying dividend from 1975 year. Current dividend yield is around 2.6%, which is a good result in technology sector. Historically during economic downturn in 2009 dividend yield spiked to around 4%. Current levels are not special occasion.

 

Drawdown risk analysis:

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ADP business is quite stable which is reflected in share price. Apart from dot.com bubble where basis for share price was high drawdowns were rather small. In my opinion 30% drawdown should be treated as a good oportunity. But on the other hand current valuation is very high and one can claim that today basis is high as well and there is a lot of space for shares to fall. In my opinion valuation at 10 times EBITDA or 15 times Earnings could be fair, which is downside from current level by ~40%. Not interesting for me now. I see no story in buying at more than $65.

 

Summing up, I like ADP for stable business and strong market position but I don’t like buying shares at such price. It is simply too expensive for me now.

 

Disclaimer ADP – no position