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Automatic Data Processing Inc Posted By : admin
Posted On : Sunday, November 16, 2014
Company Name : Automatic Data Processing Inc Investment Range : Long
Ticker : NASDAQ: ADP M.Cap.Range : Large-cap
Country : US Stock Price : 84.75
Description :        

Segment overview

Company has three segments:

a) Employer Services – Employer Services is the Company’s largest segment, with 36,000 associates in 35 countries.

b) Professional Employer Organization (PEO) Services – ADP's PEO business, called ADP TotalSource®, provides approximately 7,800 clients with comprehensive employment administration outsourcing solutions through a co-employment relationship in which employees who work at a client's location (referred to as “worksite employees”) are co-employed by ADP and the client. ADP TotalSource is the largest PEO in the United States based on the number of worksite employees, serving approximately 340,000 worksite employees in all 50 states.

c) Dealer Services – Dealer Services provides solutions to a diverse client base throughout the United States and in approximately 100 additional countries internationally, serving more than 26,000 automotive retailers and original equipment manufacturers.

**Note: Company has recently divested the dealer services business. Divested shared were given to the existing shareholders at the rate of 1:3."

Geographic Scope

ADP's customer base in US is spread across all the 50 states, also the Company has claimed that they have customers across 125 countries.

Elevator Pitch    "Overvalued – Company is decently valued at this level, entry can be made whenever there is a fall in the price.

Strong fundamentals – Fundamentals of the Company is strong with huge retention of customers in diverse geographies. Also financials of the Company is strong with a decent history of free cash flow and strong balance sheet.

Industry leader

The Company operates as an industry leader in the human capital management."

Description of Business / Business Model           "Business model

a) Revenues are primarily attributable to fees for providing services (e.g., Employer Services' payroll processing fees) as well as investment income on payroll funds, payroll tax filing funds and other Employer Services' client-related funds.

b) PEO revenues are reported net of direct pass-through costs, which are costs billed and incurred for PEO Services worksite employees, primarily consisting of payroll wages and payroll taxes.

c) The Company also recognizes revenues associated with the sale of software systems and associated software licenses (e.g., Dealer Services' dealer management systems)."

Company Positives        

"a) Core business strength – Biggest advantage of the ADP is it innovation. The Company has been into existence for the past 65 years and it has continuously given product and services to the clients which are ahead in nature.

b) Contract duration – ADP enters into contract with the customers for a period of 9 years and 4 years for software and software licensing.

c) Client retention – ADP’s Employer Services' worldwide client revenue retention rate increasing to an all-time high of 91.4% and the Company’s pays per control metric increased 2.8% for the twelve months ended June 30, 2014 from the twelve months ended June 30, 2013.

d) Long track record – ADP has long history of dividend payments to the clients.

e) Huge Market share – ADP commands a huge market share in the professional services industry, around 37.8%.


Company Negatives      

a) In the past five months insiders have sold around 208,851 shares in the market.

b) The Company operates in a highly competitive industry.

c) Reduction in rating – Moody’s have recently downgraded the Company’s rating from AAA- to AA."

Company History            

• Automatic Payrolls, Inc, a manual payroll processing service was launched in 1949

• Company introduce state of art bookkeeping machine in 1950

• Product sales started in the year 1952 – 54 with a new team

• Product sales team was setup in 1952 – 554 and in 1955 the Company started selling the concept of outsourcing with gained more and more business in northern New Jersey and New York City.

• In 1956 Client base grew to 200, further more and more automated processing of payroll was introduced. Converted all operations from manual bookkeeping machines to automated punch card accounting.

• In 1958, the Company’s name was changed to Automatic Data Processing (ADP)

• In 1961, the Company went public and in the following year they entered into new business of back office accounting and street brokerages.

• In 1977, the Company expanded internationally by opening offices in UK

• In 1985, the Company touched the revenue mark of $1 billion

• By 1990 after 40 years in business, the Company has more than 200,000 clients, nearly 20,000 associates, and annual revenue of $2 billion. In addition to payroll services, ADP was the leading provider of processing services to the retail auto and truck industry, and processed claims for most major casualty insurance companies.

• In 1995, ADP acquired the largest payroll and human resource services company in Europe — GSI, headquartered in Paris

• 1998 – Leveraging the Power of the Internet: As ADP increased its global focus, technology and early adoption of the Internet helped the company serve clients virtually anywhere in the world.

• In 2000, the Company developed an International payroll and HR system.

• In 2006, the Company started publishing National Employment report

• In 2009, ADP mobile app, to provide access to its small business payroll platform from mobile devices.

• In 2012, Forbes named ADP one of the World’s most innovative companies

• In 2014, ADP celebrated 65 years in business, served 620,000 customers in 125 countries, and counted 15 years of having cloud-based software."


ADP's customers are diverse and the Company supports all Large, Mid and small size businesses in 125 countries. In an article dated 2011 it is mentioned that ADP processed the paychecks of some 33 million people around the world in 2010 of which processed some $1.2 trillion in payments to workers in the U.S.

Industry Overview         


a) Paychex, Inc. – Target customers are Small and mid size business

b) Insperity, Inc.

c) Intuit Inc.

d) The Ultimate Software Group, Inc.

e) Total System Services, Inc.

f) The Western Union Company

g) Computer Sciences Corporation

h) Global Payments Inc."

Earnings Growth Driver **Company’s growth is dependent on the retention of existing customer base and addition of new customer.

M&A     "Acquisitions in the past three years

a) Recently in Sep 2014, ADP has done spin off of their Dealer services business. The Company acquired two businesses during fiscal 2014 for approximately $28.5 million, net of cash acquired.

b) The Company acquired two businesses during fiscal 2013 for approximately $40.4 million, net of cash acquired.

c) The Company acquired seven businesses in fiscal 2012 for an aggregate purchase price of approximately $292.3 million, net of cash acquired. These acquisitions resulted in approximately $182.6 million of goodwill. Intangible assets acquired, which total approximately $90.0 million for these seven acquisitions, included customer contracts and lists, software, and trademarks that are being amortized over a weighted average life of approximately 11 years."

Comments on Financials

a) ADP has a decent financial track record. On looking at the past 10 years, the Company has generated decent enough cash flow.

b) ADP’s retained earnings has increased from $4.5 billion in the FY’ 2008 to $6.6 billion in FY’ 2014.

c) ADP has enhanced shareholders value through regular payment of dividends and buybacks; in fiscal 2014 the Company has returned excess cash of $883.1 million through dividends and $667.3 million through share buyback program.

d) In the last five fiscal years, the Company's common stock outstanding by approximately 4% through share buybacks, net of the effect of common stock issued under employee stock-based compensation programs

e) ADP has also raised the dividend payout per share for 39 consecutive years."


On looking at the multiples the Company is reasonably valued. Can be added as and when the prices fall.

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