Automatic Data Processing: Can Provide Good Long-Term Returns

Automatic Data Processing (ADP) is a technology-based outsourcing solutions provider for employers across the globe, and it operates through Employer Services and Professional Employer Organization (PEO) Services segments. The company has posted an average positive earnings surprise of 1.11% over the past four quarters until second-quarter 2015.

The company declared third-quarter 2015 results last month, and the momentum of posting positive earnings surprise continued into the third-quarter as well with a positive 2% earnings surprise. Let’s take a look at the underlying business of the company during the third-quarter and what it holds for investors, going forward.

Looking back

The third-quarter results were solid. Despite strong headwinds of foreign currency translation, Automatic Data Processing reported a 7% year-over-year growth in revenue on the back of 6% year-over-year growth in worldwide new business. In the current fiscal, year-to-date new business bookings growth is a whopping 11%, thereby ensuring that the company is all set to achieve the full year growth target of 10% that it had set for itself. This has been possible due to effective execution of HCM strategy.

On the back of robust top-line growth, the pre-tax profit grew by a solid 12% versus the year ago period. This is despite the negative impact of 2 percentage points due to foreign currency translations.

HCM strategy driving growth

The HCM strategy revolves around three core pillars, as outlined during the investor day conference:

  1. Continue to innovate from core platforms to grow a full suite of cloud-based HCM solutions that work together seamlessly.
  2. Continue to scale the company’s industry-leading outsourcing solutions
  3. Expand into global markets that can benefit from the HCM offering and grow globally with the clients.

A result of successful execution of these initiatives has been the solid third-quarter results. As the company further expands the global footprint on the same premise, the growth momentum is all set to continue. As at the end of the third quarter, the HCM solutions were already on offer in 104 countries globally.

In February, Automatic Data Processing announced the opening of a new Center of Excellence in Bucharest, Romania. In combination with its operations in Prague and Barcelona, the Bucharest center enhances the capabilities of the company in Europe.

BIG Data is another growth driver

Big Data analytics empowers the decision makers to make better decisions. In the U.S. alone, HCM is paying 1 in 6 private sector workers. This is the biggest data set of its kind in HCM and positions Automatic Data Processors to deliver insights that enable better HR decisions.

The company plans to announce new products which leverage the unique data to deliver insight across HR, wages, time, benefits and talent depending on the client’s HCM platform. These new products will drive growth going forward, while empowering clients with a better HR decisions.

SaaS platform performing well

The SaaS platform also continues to deliver results in line with expectations during the current fiscal. The fiscal year-to-date client retention remains at record levels. ADP continuously keeps updating the platform to align with clients requirements. One such example being the ADP Health Compliance, which helps clients manage the complexities of compliance with the Affordable Care Act. The upmarket clients continue to show interest in the platform and ADP has recently introduced to mid-market clients, thereby increasing the addressable market size.

Final words

ADP has been delivering good numbers over last few quarters. For the next five years, analysts expect the company to grow at a CAGR of 10.40% versus 4.90% is the past five years. ADP is expected to perform better on the back of high client retention rates, improved execution of plans, and new products that it is planning to launch. However, one should also keep in mind credible near-term competitive threats from the likes of Paychex Inc. (PAYX) and Equifax Inc.(EFX), and also the macroeconomic headwinds. All said, this looks to be a good stock to bet on for the long-term.