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Automatic Data Processing: $ADP cash flow valuation

Jan. 17, 2012 1:34 PM ETADP
Eric Cota profile picture
Eric Cota's Blog
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Current Price: ~ $56/share
Projected Yield: ~ 2.88%




ADP competes in the human resources administration services industry. The firm provides services that satisfy companies' human resources needs, such as payroll processing and benefits administration. The firm was founded in 1949 and has its headquarters in Roseland, N.J. It serves more than 550,000 clients with 46,000 employees worldwide.


I estimated the firm's WACC today at 8.82% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:
Year
FCF $Millions
2002
1276
2003
1431
2004
1188
2005
1237
2006
1402
2007
975
2008
1509
2009
1309
2010
1455
2011
1428

Average Annual Growth FCF: ~ 4%
CAGR FCF: ~ 1%
Consensus Forecast Industry 5-Year Growth: ~ 20% per year
Consensus Forecast Company 5-Year Growth: ~ 10% per year
Internal Growth Rate: ~ 2%
Sustainable Growth Rate: ~ 11%

Scenario 1
Starting at $1428 million FCF, assuming the company achieves a 5-year growth rate in FCF of 10% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:

Discounted Cash Flow Valuation
Year
FCF $Millions
0
1428
1
1571
2
1728
3
1901
4
2091
5
2300
Terminal Value
28678

The firm's future cash flows, discounted at a WACC of 8.82%, give a present value for the entire firm (Debt + Equity) of $26167 million. If the firm's fair value of debt is estimated at $26 million, then the fair value of the firm's equity could be $26141 million. $26141 million / 489 million outstanding shares is approximately $53 per share and a 20% margin of safety is $42/share.


Scenario 2
All else being equal, assume the company achieves a 5-year growth rate in FCF of 10% per year, then growth in FCF of 2.50% per year forever: :

Discounted Cash Flow Valuation
Year
FCF $Millions
0
1428
1
1571
2
1728
3
1901
4
2091
5
2300
Terminal Value
40019

The firm's future cash flows, discounted at a WACC of 8.82%, give a present value for the entire firm (Debt + Equity) of $33599 million. If the firm's fair value of debt is estimated at $26 million, then the fair value of the firm's equity could be $33573 million. $33573 million / 489 million outstanding shares is approximately $69 per share and a 20% margin of safety is $55/share.


Sources
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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