Automatic Data Processing (NASDAQ:ADP) is the largest provider of payroll outsourcing services in the world. Additionally, ADP provides services such as data progressing, benefits administration, tax filing, and human resources outsourcing. Employer Services and Dealer Services are the two primary business segments that account for the majority of ADP's revenues.
Employer Services provides services such as payroll, human resource, tax filing, reporting, and benefits administration services to over 570,000 customers in Asia, Australia, Brazil, Europe, and North America. Dealer Services is a global provider of professional services, data products, and transaction systems to automobile/truck dealers and manufacturers.
We believe that ADP has a very solid, high return on capital business that does not require significant capital investments to grow. ADP has a few headwinds hurting its business with high unemployment rates in many of its markets affecting its Employer Services segment and low auto sales in Europe affecting its Dealer Services segment. Over the next few years, we expect these headwinds to moderate providing a nice boost to ADP's earnings.
One aspect of ADP's business that we believe will allow ADP to continue to earn outsized returns is the fact that the market for payroll outsourcing services is huge. So large, in fact, that ADP should be able to grow this segment of its business for at least the next decade. More to the point, providing payroll outsourcing services to small and medium sized businesses should provide ADP with fertile ground for growth for the foreseeable future.
Analysts' estimate that ADP will earn $2.91/share in 2013 and $3.18/share in 2014. We believe that these estimates are a bit low and that these estimates underestimate the improving United States job market as well as underestimate the potential for significant share repurchases.
We believe that ADP is a good value for the following reasons:
- According to S&P, ADP has a AAA credit rating which is better than the credit rating of the United States Government.
- ADP has a generous dividend yield of 2.60% and a history of consistent dividend increases with a 10% increase in the dividend last year.
- ADP has a history of share repurchases with significant repurchases over the last 6 years totaling 130 million shares.
- S&P has a Buy rating on the stock (4 out of 5 Stars) and a 12 month price target of $67.00.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ADP over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: Ulfberht Capital is not an investment advisor. This article is not a recommendation to buy or sell securities. Always consult your investment advisor before making any investment decision.