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Automatic Data Processing: Cash Flow Valuation Update

|Includes: Automatic Data Processing, Inc. (ADP)

Current Price: ~ $58/share
Yield: ~ 2.73%

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 560,000 clients with 57,000 employees worldwide.

Estimated WACC for the firm today is 9.89% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year FCF $Millions
2003 1431
2004 1188
2005 1237
2006 1402
2007 975
2008 1509
2009 1309
2010 1455
2011 1428
2012 1661

Average Annual Growth FCF: ~ 4%

CAGR FCF: ~ 2%
Consensus Forecast Industry 5-Year Growth: ~ 19% per year

Consensus Forecast Company 5-Year Growth: ~ 9% per year

Internal Growth Rate: ~ 2%

Sustainable Growth Rate: ~ 11.5%

Scenario 1
Average FCF (2012, 2011, 2010) is $1515 million

  • Start at $1515 million FCF
  • Assume a 5-year growth rate in FCF of 9% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 1515
1 1651
2 1800
3 1962
4 2139
5 2331
Terminal Value 25701

The firm's future free cash flows, discounted at a WACC of 9.89%, give a present value for the entire firm (Debt + Equity) of $23435 million. If the firm's fair value of debt is estimated at $17 million, then the fair value of the firm's equity could be $23418 million. $23418 million / 485 million outstanding shares is approximately $48 per share and a 20% margin of safety is $38/share.

Scenario 2
All else being equal,

  • Assume a 5-year growth rate in FCF of 9% per year, then 2.50% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 1515
1 1651
2 1800
3 1962
4 2139
5 2331
Terminal Value 34400
  • Present Value of the entire firm (Debt + Equity): $28865 million
  • Value of Equity: $28848 million or $59/share
  • 20% margin of safety is $47/share

Sources

Morningstar.com

Yahoo! Finance

Automatic Data Processing

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