Automatic Data Processing Continues To Grow Faster Than Smaller Peers

Aug.19.13 | About: Automatic Data (ADP)

Payroll processing firm Automatic Data Processing (NASDAQ:ADP) announced decent fourth quarter results. Revenue increased 7% year-over-year to $2.8 billion, roughly in-line with consensus estimates. Earnings were a penny shy of consensus expectations, increasing 6% year-over-year to $0.55.

ADP benefits greatly from increased employment, particularly since the firm is synonymous with payroll processing and management. Revenue from its 'Employer Services' division grew 8% year-over-year during the quarter to $2 billion. Management noted that growth was organically driven, as the firm didn't make many acquisitions. Bookings increased at a double-digit pace during the fourth quarter, and we saw its pretax operating margins jump 120 basis points year-over-year. Client retention for the segment was robust during 2013 at 91.3% (40 basis points higher than 2012).

ADP's 'Professional Employer Organization Services (NYSE:PEO)' division experienced year-over-year revenue growth of 11% to $487 million as more organizations opted to outsource HR management. We're huge fans of this business, particularly in the event that small business formation accelerates. The value-add for PEO services is huge, especially since it allows busy owners to focus on business-centered operations rather than the often tedious day-to-day back office tasks. Pretax operating margins in the segment increased 50 basis points year-over-year as cost growth slowed.

The one downside during the quarter came from 'Interest Held on Funds Held for Clients'. As a payroll processor, ADP acts as the middleman between employers and employees, so it holds funds between pay periods. Historically, this has been a nice high-margin source of revenue for ADP, but the prevailing low interest rate environment has pressured this source of earnings. Interest income fell 16% year-over-year to $100 million during the fourth quarter and declined 15% for the full-year to $421 million. Still, a higher interest rate environment could provide a nice boost to segment earnings.

Looking ahead, ADP gave relatively strong fiscal year 2014 guidance. Sales are expected to increase 7% to $12.1 billion, driving earnings growth of 8%-10% and implying earnings per share of $3.12-3.18 for the fiscal year.

Valuentum's Take

ADP is easily the largest HR/payroll outsourcer, dwarfing competitors like Paychex (NASDAQ:PAYX) and Insperity (NYSE:NSP). Still, the smaller competitors don't appear to be growing earnings at a faster clip. Paychex expects service revenue to advance 5%-6% and net income to grow 8%-9% in its fiscal year 2014 (ending May 2014), while Insperity's adjusted net income ($19.3 million) was roughly flat year-over-year over the first six months of its 2013 fiscal year. At this time, the cohort looks fairly valued, so we aren't interested in adding shares of any payroll processor to the portfolio of our Best Ideas Newsletter.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.