This article is proudly sponsored by the Business Ethics Team at the University of Texas at Austin!

About Automatic Data Processing

First things first, let’s spare ourselves some frequent annoyance and instead of calling this company by its more formal name, let’s just call it what it is also and even more commonly referred to as, ADP.

Ah, that’s better.

So, ADP is a company that I am actually somewhat familiar with in a more personal sense, as, for those who have read other recent previous stock analysis articles, you obviously remember that I used to work at Red Lobster and during my onboarding at the restaurant, I kept hearing “ADP” floating around between managers and other newly minted Red Lobster employees, and pretty much all I knew about ADP is that it had something to do with payroll.

And upon further review, that is actually pretty much it, as ADP, founded in 1949 as “Automatic Payrolls,” by Henry Taub, the original founder of the company seemingly set the integration of computational technology and human capital management (HCM) in motion, which has only exploded since its inception with the rise of fully integrated multi-million and billion-dollar platforms such as Workday, Oracle and Dayforce, among many other mainstream HCM software vendors.

But back to ADP, headquartered in Roseland, New Jersey, this company is one of the largest, most well utilized automated payroll platforms, which is hardly any secret given that it produces most of its total annual revenues through payroll processing services (i.e., with Red Lobster, among many other enterprise and organizational clients) as well as its human resources (HR) management software offerings, among other related product and service solutions centered around one’s enterprise, particularly in the context of human resources and the back-end operations with respect to the direct relationship between an employee and their respective employer.

It is sort of interesting to seriously ponder whether or not ADP is recession resistant or not, however, given the relatively small amount of information we know and have gathered regarding this company, we would certainly venture to say that it is more recession resistant than not, as regardless of the state of the greater overall economy and employment numbers and trends, businesses, small and large, will need a reliable back-end to keep track of their employees and their wages, benefits and the plethora of other variables between the two primary involved parties.

This is also one of those industries filled with company-centric value propositions that are so sticky in the sense that once a client is signed up and fully integrated within Automatic Data Processing’s (ADP) system and network, it is going to be an absolute pain to disentangle itself from the platform, which, evidently is a positive for ADP and other HCM companies as well.

To list only a few of the organizations ADP works with, the list includes the likes of Dell Technologies, Camping World, Pacers Sports and Entertainment, The Boston Globe, the Hunter Family of Companies, and so many other small and large enterprises that probably aren’t going to part ways with ADP anytime in the near future.

With this sort of overview of ADP, let’s learn more about this historically significant company through its core financials and other pertinent figures in hopes of ultimately conjuring up an opinion as to whether or not this company’s stock (NASDAQ: ADP) is worth purchasing as a long-term investment.

ADP’s stock financials

With a present share price of $228.24, an associated market capitalization of $93.88 billion along with a price-to-earnings (P/E) ratio of 27.38 and an annually issued dividend of $5.00 even to its shareholder base, let’s just say things are off to an interesting start as they relate to Automatic Data Processing, as it appears as though the company’s shares (NASDAQ: ADP) are trading at a modest premium relative to their actual, intrinsic worth based on the company’s price-to-earnings ratio being around six points greater than that of the commonly held fair value benchmark of 20.

However, perhaps this company’s revenues have been growing on a year-over-year (YOY) basis, therefore justifying paying a modest premium for an ownership stake in this firm’s stock, but, honestly, we don’t presume they are growing revenues on a consistent, YOY basis given just how old and established this company is.

Of course, in this respect, we would completely invite being proven wrong.

Additionally, given the size of this company’s annual dividend, we presume (however, we will verify later in this article, of course) that ADP is a very cash flow generative business, and, obviously, let’s hope we aren’t wrong on this assumption, however, for a company as large and established as this one, it would make sense that it would be a cash generating machine and it would also frankly not be in the firm’s best interest if it began pushing the envelope with respect to how much of a dividend it issues, so it can likely comfortably afford to issue said dividend, but again, we will perform some more due diligence on this matter.

Regarding the overall condition of the company’s balance sheet, ADP’s executive team is responsible for caring for and deploying just about $51 billion in terms of total assets as well around $47.4 billion in terms of total liabilities, which, as this company continues venturing further and further into the Cloud, makes some sense since it does require a rather sizable amount of investment to merely remain competitive from a technological standpoint, and in pursuing this, a company such as ADP likely had to tack on some debt to its books in order to finance said pursual.

If this is the case, we don’t mind this at all, as the company is still total asset-heavy and even if it did experience an upcoming mild spike in total liabilities, we don’t think a business as large and depended upon as ADP is going to not receive the necessary funding and loans it might end up needing, and to us, this is the worst case, semi-extraordinary scenario.

In the context of pursuing growth as a large business, strapping on some serviceable amounts of debt in order to grow offerings and other revenue streams isn’t much of a bad thing at all, that is, if said debt is being handled and deployed in a responsible manner.

At any rate, moving onto the company’s income statement, ADP’s total annual revenues since 2019 have been boring for the most part, however, there actually has been some rather unexpected yet mild growth in year-over-year (YOY) revenues, with, for instance, the company’s total annual revenue between 2019 and 2021 staying at and ever so slightly around $14 billion and $15 billion, however, ADP’s revenues increased in 2022 to $16.4 billion, leading up to its latest reported figure of just north of $18 billion, as reported in late June 2023.

Candidly, while this growth in revenues is a positive, we find it rather challenging to definitively say whether or not this trend will continue, as we maintain our fair share of hesitancies in passively assuming that this trend will remain moving forward, as ADP likely initiated some price hikes during the handful of years due to supply chain stress(es), the effects of the public onset of COVID-19, the recent continual rise in interest rates, among other factors that allowed it to flex its pricing power, however, as rates inevitably trickle down (hopefully, that is), ADP might lose revenue steam through easing the costs it imposes on its clients.

We are just sort of at an impasse with this company’s ability to continue churning out revenue growth and we are not in the business of making random, potentially dangerous, unbased guesses, thus the extreme honesty.

At the end of the day, none of us can really predict the future, however, revenue growth is revenue growth and if ADP is doing a fine job in flexing its pricing muscle, then why should we complain and there doesn’t seem to be much in the way of preventing the company from continuing to do this at a reasonable rate moving forward, either, ceteris paribus, that is.

As it relates to Automatic Data Processing’s cash flow statement, not to toot our own horns or anything, but toot-toot, as both the company’s net income and total cash from operations are as eerily consistent and positive as we had initially presumed and hoped for, with, for instance, the company’s total cash from operations ranging from (again, during the period between 2019 and 2023) around $2.6 billion (2019) and $4.2 billion (2023), growing every single year during this era.

Yes, this is a good, if not a great thing, as the numbers are proving that ADP is great at turning over cash.

ADP’s stock fundamentals

Speaking of the company’s ability to turn a profit and how it measures up against the competition (on average), according to the figures shown on TD Ameritrade’s platform, ADP’s trailing twelve month (TTM) net profit margin is well above that of the competition’s cumulative average, standing tall at 19.07% to the industry’s listed respective average of 8.91%, clearly highlighting this HCM company’s dominance in its respective category, leaving certainly a positive impression on us, as we view this as a great point of validation that ADP is able to out-profit its industry peers, again, on average.

In addition to the company’s outstanding comparable TTM net profit margin, ADP’s TTM return metrics as they relate to assets and investments are also where we like to see them, as, for example, the company’s TTM return on investment is listed at a whopping 45.67% to the industry’s respective average of 17.75%, which, comparably, isn’t all that comparable, not to also mention the fact that the company’s listed TTM return on assets stands at a less imposing yet impressive and competitive 7.3% to the industry’s respective average of a mildly competitive 6.15%.

Evidently, we like what we are seeing from ADP at the moment with respect to its returns profile.

Should you buy ADP stock?

Our biggest and nearly only sticking point with this company is its current valuation, particularly referencing its prevailing price-to-earnings (P/E) ratio.

However, all things considered, around six points higher than the commonly ascribed fair value benchmark isn’t all that much when you are dealing with a company that is incredibly good at generating cash, has a healthy TTM net profit margin, extremely competitive TTM returns on both assets and investment(s) with respect to the competition and a business model that lends itself resistant to recessionary pressures in more ways than not.

Therefore, Automatic Data Processing’s stock (NASDAQ: ADP) doesn’t seem to be a bad equity investment to consider, especially as it continues further integrating technology into the back-end of its business segments, perhaps putting up a bigger and better fight against Workday and others.

We give this company’s stock a “buy” rating.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.