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