Automatic Data Processing: A Sell At Current Share Price

Summary

• Automatic Data Processing has provided solid returns for shareholders over the last five years or more.
• It's a leading global provider of cloud-based Human Capital Management (“HCM”) technology solutions to employers around the world.
• Automatic Data Processing has shown solid growth over the last five years and that's likely to continue in the longer term.
• The COVID-19 pandemic has had, and will likely continue to have, an adverse impact on its business operations for two years or more.
• The shares have been priced for growth, and without that growth expect a sustained period of lower share prices.

Automatic Data Processing: Investment Thesis

Automatic Data Processing (NASDAQ:ADP) is a sell at its present share price. Automatic Data processing showed up in my screening of DGI+ Club database of dividend-paying stocks as likely to provide above average returns at present share price. Closer analysis and review does not confirm that preliminary assessment. High unemployment resulting from COVID-19 is expected to last well beyond the end of the COVID-19 pandemic, the end of which in itself is highly uncertain. This will have an adverse impact on ADP's earnings for an indefinite period. The main issue with ADP's share price is the company has been attracting a very high P/E multiple due to a record of high EPS growth. A combination of a reduction in EPS due COVID-19 and a reduction in P/E multiple due to curtailed growth represents a double whammy for the share price. That impact has likely not yet been fully felt. It might not be fully reflected in the share price until full-year results through end of June are announced in July or thereabouts. The company has a solid balance sheet, with negligible net debt, and will likely continue to show positive, although reduced, earnings, and will certainly survive through this pandemic. The issue is purely with the share price which has not adjusted sufficiently to reflect the environment the company now operates in.

From the ADP 10-Q filing for third quarter ending March 31, 2020 -

The PEO average number of Worksite Employees increased 7% for the three and nine months ended March 31, 2020, respectively; however, we are expecting slower growth in the fourth quarter due to layoffs and furloughs at our clients and an anticipated increase in out-of-business losses. Our pays per control metric, which represents growth of the employee base for a large portion of our client base, showed a decline

Analyst’s Disclosure:I/we 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.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. I do not recommend that anyone act upon any investment information without first consulting an investment advisor and/or a tax advisor as to the suitability of such investments for their specific situation. Neither information nor any opinion expressed in this article constitutes a solicitation, an offer, or a recommendation to buy, sell, or dispose of any investment, or to provide any investment advice or service. An opinion in this article can change at any time without notice.