Automatic Data Processing (ADP) is a cyclical business. Its revenues are generated from business services, and when business cuts back on those services the revenue falls. Naturally, the company’s revenue has fallen off as of late.
The RBP Snapshot below shows what the current price of the stock implies about future revenue growth.
ADP will need to generate revenue equal to $8.6 billion in the next twelve months, or 1.6% less than it did over the previous twelve months, as well as more substantial revenue growth (4%-6%) in the years thereafter. Can it do this?
It is an interesting question because the bulk of ADP revenues are from payroll processing. This is highly dependent upon employment levels. Even though some see signs that the economy is recovering, there is little indication that unemployment is falling. In fact, it keeps rising. And as it does, payroll revenues will keep declining.
As the nation’s largest payroll processor, ADP’s performance is highly negatively correlated with unemployment levels. So should we pose this as a macroeconomic question? That is, if the company’s Required Business Performance suggests revenues will fall slightly in the next year, but begin growing after that, can we infer that investors are expecting the rise in unemployment to slow over the next year and begin declining in 2011?
What other factors might contribute to revenue or free cash flow growth even in the face of continually rising levels of unemployment?
