Is ADP Stock A Buy?

Automatic Data Processing Inc (NASDAQ:ADP) provides human resources software and services to a large customer base. Its focus on functions like payroll, taxes, and benefits administration makes it a foundational enterprise platform. Founded in New Jersey in 1949, it’s long been a part of the American economy.

Well established businesses offer confidence to long term investors of a company’s resilience through booms and busts, but right now is ADP stock a Buy?

The company was slow to recover when markets rebounded after the Q1-Q2 2020 stock market scare. It only started to approach its pre-pandemic market capitalization level in the fourth quarter of 2020. In essence, it was a lost year for ADP share price as far as investors were concerned.

And it’s unclear whether the company will outperform the market moving forward. Let’s clock into this company to see if it’s already time for investors to clock out or whether it can pay time and a half in overtime.

ADP = HR Support + Operations

ADP is a full-service human resources company. Its revenue streams can essentially be broken into two categories,

• Employer Services and
• Professional Employer Services

One involves its full suite of software applications to support all aspects of HR operations. The latter involves ADP acting as the company’s HR department.

Both sectors were upended when the economic tides turned. It wasn’t clear how businesses would handle their technology spending nor which would bring operations in house. This put a major question mark over the company’s head that hung through most of the year. But business did eventually pick up.

The company provided yearly guidance in October to reassure investors that it had a strategy in place to increase its bottom line while revenues flatline in the short term.

It also showed increases in some market segments like hospitality converting to its services. These are good signs the company is on the right path for profitability.

This gave it a 33 percent price jump that finally returned ADP share price to its former high levels. But is it enough?

Is ADP Stock A Buy?

ADP market capitalization has been flirting with the $75 billion level for some time. With its earnings ranging from $1.00 to $1.80 per quarter, the company’s P/E ratio suggests this valuation is a little lofty.

A fair market value for ADP share price produces a level of $164 per share. Prices higher than that suggest the company is somewhat overvalued.

Nevertheless, it has a solid quarterly dividend payment history, which ended 2020 at 2.08 percent yield on a $3.72 annual dividend. The pandemic did nothing to stop the payouts at an increased rate from the prior year.

The company’s elevated market capitalization is based on analysts’ belief in the company’s robust fundamentals staying strong even during a recessionary period. Private payroll and other services were hindered for some time, however, as many businesses were deemed non-essential during the quarantine.

The hospitality industry in particular rushed to adopt the company’s outsourced payroll solutions as a way to manage costs with mass furloughs needed.

Tourism and travel also took a nosedive, and hotel vacancy rates skyrocketed during the pandemic. This market segment will be slow to recover, but ADP can continue growing because of their woes.

It also has a strong track record in strategic acquisitions, buying firms like Celergo, WorkMarket, and Global Cash Card, all of which extend its reach in targeted market segments.

Attractively, its business model features significant recurring revenue with long-term contracts.

Of course, even human resources specialists can have problems.

ADP Stock: What Could Go Wrong?

It’s unclear how expensive cloud-based options like ADP will be to run moving forward. The company already sees increasing operational expenses and passthrough costs, and it is spending money like there’s no tomorrow on acquisitions too. 

Profit margins are going to continuously feel a squeeze as the company works through its debt load while working to acquire new customers in a tougher market.

Businesses are tightening purse strings, and ADP needs a robust sales force to supplement any clients it loses over the next five years as the economy recovers.

Meanwhile, B2B tech stocks in general suffered a chill from investors in November as the announcement of positive COVID-19 vaccine results sparked renewed hope in a reopened economy. Of course, it’s unclear how it will truly affect this company’s bottom line.

With that said, market perception is a powerful driving force. If a company grows and nobody’s around to see it, does it really matter?

Can ADP Competitors Stall Its Progress?

Human Resources is all about getting along, but that doesn’t mean the industry is without competition. ADP faces stiff rivalries from the likes of SAP, Workday, Oracle (ORCL), and Paychex (PAYX), among others.

Each has its own proprietary platform and services to match ADP in its markets. And that’s just the direct competition.

Market conditions can cause companies to bring outsourced operations in-house, depending on expenses. In addition, mass layoffs and furloughs (along with businesses closing) mean fewer employees to be tracked in the first place.

These market conditions lead to a smaller customer base and more competitors want to claim their own piece of the pie. It makes for a fiercely competitive market that ADP will need to continue spending to outpace and overcome. However, the entire market could stagnate for the foreseeable future.

Is ADP Stock A Buy? The Bottom Line

ADP is a full-service HR technology and services company with a widespread customer base across a lot of revenue streams. Its business model depends on offering cloud-based subscription software and a-la-carte service to be a turnkey HR for any company that needs any piece of that.

When the market crash hit, the company rebounded slowly and has choppy earnings going forward which risks causing share price turbulence should expectations fail to be met.

Now that it has guidance for the future, it could be a great long-term play. However, short term growth potential is limited as businesses cut costs and operational costs eat away at profits.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.