ADP Reaches $60 By Targeting Small Businesses With Xero

Jul.26.12 | About: Automatic Data (ADP)

Automatic Data Processing (NYSE:ADP) recently announced that its RUN platform will be integrated with Xero's online small business accounting software. The RUN platform is a cloud based solution which provides payroll and tax administration services for small businesses. Since this integration with Xero will provide businesses with greater insight into the financial situation of its company, we believe that this is an offering which could help increase the number of small business clients currently with ADP.

Check out our complete analysis of ADP here

According to our estimates, payroll processing represents approximately 75% of ADP's total value. Small businesses are not the primary driver in this segment but an increase in either the number of employees at an average small business or the number of small businesses using ADP's services can provide upside to the stock. For example, if taken by itself, the average number of employees in small businesses per client increases to approximately 16, it would provide 5% upside to ADP's value. Additionally, if the average number of employees per small business client increases to 13, and the number of small business clients also increases to approximately 520 thousand, it would also provide a 5% upside to the company's value.

We believe that a couple of new developments in recent months could be catalysts in increasing the average number of employees per client, the number of small businesses clients or both. Currently, there is a tax bill being negotiated in Congress which seeks to provide financial incentives for small businesses who hire additional employees. Some estimates state that, if the bill passes, it would create approximately a million jobs in the economy, primarily in the small business sector. If this occurs, we can expect the average number of employees per client for small businesses using ADP to increase.

Even if the bill does not pass, ADP should benefit from America's focus on generating economic growth by stimulating small business growth and employment. In ADP's favor are new bills such as the JOBS act, which aims to reduce restrictions on the funding of small businesses. Initiatives such as this, which provide more cash to small businesses, should spur small business creation and employment.

We believe that ADP, by integrating with an online accounting provider such as Xero, is providing a platform that makes it much easier for a small business to manage its finances. In a challenging economic environment, where small businesses must focus on what they do instead of dealing with the difficulties of payroll management, this platform could provide ADP with a greater number of small business clients.

We currently have a $60 price estimate for ADP, which is approximately 10% above the current market price.

Disclosure: No positions