ADP Security Evaluation

Valuation of a Security

Automatic Data Processing, Inc.


by: Katie S. McCarthy

April 7, 1999
Spring Hill College
Management of Financial Resources
Dr. Ralph Sandler
ADP – Automatic Data Processing, Inc. (NYSE:AUD)

ADP is one of the largest independent computing services firms in the world with more than $4.5 billion in annual revenues and more than 425,000 clients. Founded in 1949, ADP provides computerized transaction processing, data communications, software, and information services to companies in virtually every industry. ADP Employer Services is the world’s largest provider of payroll services and human resource administration systems. It offers a comprehensive range of benefits, payroll and business tax deposit and reporting, time and attendance, 401(k) recordkeeping, and unemployment compensation and management services.

In addition, ADP provides securities transaction processing and investor communications services to the brokerage and financial communities, industry-specific computing and consulting services to auto and truck dealers, and computerized, automated auto-repair estimating and auto parts availability services to the auto-repair industry.

I picked ADP to analyze because their Dealers Services Group is a major player in the same industry as the company I work for, ABMC, Inc., Automotive Business Management Consultants, Inc. Computerized automated management for auto and truck dealers is big business, and there is stiff competition for dealer’s business. Because of ADP’s size and diverse corporate structure, it is difficult to make comparisons with ABMC, Inc. We are still very small with only 38 employees and about 1,000 dealers. In addition, ABMC, Inc. is still privately owned with no outstanding security issues. Automotive related software is our only business as well. ADP is quite diversified and their Dealer Service Group provides only 15% of the company’s total revenue.

Over 18,000 auto and truck dealers in the United States, Canada, Europe, Asia, and Latin America use ADP’s on-site systems and communications networks to manage virtually every are of operations. From parts sales, to repair service, to new vehicle to sales to bookkeeping. ADP systems and services target every aspect of the auto dealership.

Earning Growth

ADP has a remarkable record of earning growth. In July of 1996 it was published that “ADP is the only public company in the nation to achieve consistent, record growth in earning and revenue for 139 quarters, nearly 35 years.” Well, they have now reported 150 consecutive quarters of record sales and earnings. That’s 37 straight years of double-digit earnings per share growth. In just the past four years the earnings per share has grown at an average rate of 14%. Not only do analysists expect ADP shares to continue to perform, but the prediction is for the shares to actually outperform the market in the coming months.

Total revenue and net earnings have also steadily climbed for ADP. In the September 14, 1998 listing of VARBusiness’ Top 100 Stocks, ADP ranked 44th based on an average annual return of 22.0%. Two stiff competitors in the Dealer Services business, Reynolds & Reynolds and EDS ranked 46th and 57th, respectively.

ADP stock carries Value Line’s highest safety ranking. Their high recurring revenue stream, predictable interest income, and low exposure to foreign markets makes it an excellent portfolio holding.
Quality of Management

Much can be said about ADP’s management as well. An October 1997 article in Sales & Marketing Management noted ADP’s sales-oriented culture, and gave their management praise for continually making strategic changes to improve efficiency. Weekly sales meetings at regional offices are designed to recognize and reward high achievers, as well as motivate sales personnel lagging behind. Wild applause and standing ovations are commonplace at these events. Upbeat music plays and high-fives abound, as employees share in camaraderie not often found in the workplace.

According to stock analyst James A. Meyer, “This company is so well managed that it’s the envy of everyone on Wall Street.” Meyer went on to say, “…ADP manages resources prudently. All things being equal, far fewer people get far more done at ADP than at the average American corporation. That’s because it’s decentralized.” ADP’s theory rests in not making something complicated that isn’t. Employees in the field report to management; management doesn’t try to micromanage every little aspect of the company.

ADP has had over 150 acquisitions since it’s inception. Added all up, though, and it doesn’t account for 25% of the company today. According to former CEO Josh