Automatic Data Processing Inc Valuation – February 2019 $ADP

Company Profile (excerpt from Reuters): Automatic Data Processing, Inc. (ADP), incorporated on June 12, 1961, is a provider of human capital management (HCM) solutions to employers, offering solutions to businesses of various sizes. The Company also provides business process outsourcing solutions. Its segments include Employer Services and Professional Employer Organization (PEO) Services. The Company markets its solutions primarily through its direct sales force. Employer Services also markets its solutions through indirect sales channels, such as marketing relationships with banks and certified public accountants, among others.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of ADP – February 2019

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $65,200,741,302 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.05 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 63.57% Pass
6. Moderate PEmg Ratio PEmg < 20 36.51 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 13.76 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.05 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 1.44 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $4.10
MG Growth Estimate 5.66%
MG Value $81.26
Opinion Overvalued
MG Grade D+
MG Value based on 3% Growth $59.44
MG Value based on 0% Growth $34.84
Market Implied Growth Rate 14.01%
Current Price $149.67
% of Intrinsic Value 184.18%

Automatic Data Processing does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $2.98 in 2015 to an estimated $4.1 for 2019. This level of demonstrated earnings growth does not support the market’s implied estimate of 14.01% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Automatic Data Processing revealed the company was trading above its Graham Number of $30.23. The company pays a dividend of $2.52 per share, for a yield of 1.7% Its PEmg (price over earnings per share – ModernGraham) was 36.51, which was above the industry average of 29.23. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-5.39.

Automatic Data Processing scores quite poorly in the ModernGraham grading system, with an overall grade of D+.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$5.39
Graham Number $30.23
PEmg 36.51
Current Ratio 1.05
PB Ratio 13.76
Current Dividend $2.52
Dividend Yield 1.68%
Number of Consecutive Years of Dividend Growth 20

Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2018
Total Current Assets $31,682,600,000
Total Current Liabilities $30,296,900,000
Long-Term Debt $2,002,300,000
Total Assets $38,806,300,000
Intangible Assets $3,248,100,000
Total Liabilities $34,042,400,000
Shares Outstanding (Diluted Average) 438,000,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $5.15
Jun2018 $3.66
Jun2017 $3.85
Jun2016 $3.25
Jun2015 $3.05
Jun2014 $3.14
Jun2013 $2.89
Jun2012 $2.82
Jun2011 $2.52
Jun2010 $2.40
Jun2009 $2.63
Jun2008 $2.34
Jun2007 $2.04
Jun2006 $2.68
Jun2005 $1.32
Jun2004 $1.18
Jun2003 $1.34
Jun2002 $1.75
Jun2001 $1.44
Jun2000 $1.31
Jun1999 $1.10

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $4.10
Jun2018 $3.51
Jun2017 $3.37
Jun2016 $3.10
Jun2015 $2.98
Jun2014 $2.88
Jun2013 $2.71
Jun2012 $2.60
Jun2011 $2.45
Jun2010 $2.42
Jun2009 $2.35
Jun2008 $2.11
Jun2007 $1.91
Jun2006 $1.78
Jun2005 $1.35
Jun2004 $1.38
Jun2003 $1.45

Recommended Reading:

Other ModernGraham posts about the company

Automatic Data Processing Inc Valuation – April 2018 $ADP
Automatic Data Processing Valuation – November 2016 $ADP
Automatic Data Processing Valuation – May 2016 $ADP
Automatic Data Processing Analysis – September 2015 Update $ADP
Automatic Data Processing Analysis – June 2015 Update $ADP

Other ModernGraham posts about related companies

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Iron Mountain Inc Valuation – February 2019 $IRM
Cintas Corp Valuation – February 2019 $CTAS
Fidelity National Information Services Inc Valuation – January 2019 $FIS
Avery Dennison Corp Valuation – January 2019 $AVY
Paychex Inc Valuation – January 2019 $PAYX
Fleetcor Technologies Inc Valuation – January 2019 $FLT
TrueBlue Inc Valuation – October 2018 $TBI
Convergys Corp Valuation – September 2018 $CVG

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

Automatic Data Processing Inc Valuation – April 2018 $ADP

Company Profile (excerpt from Reuters): Automatic Data Processing, Inc. (ADP), incorporated on June 12, 1961, is a provider of human capital management (HCM) solutions to employers, offering solutions to businesses of various sizes. The Company also provides business process outsourcing solutions. Its segments include Employer Services and Professional Employer Organization (PEO) Services. The Company markets its solutions primarily through its direct sales force. Employer Services also markets its solutions through indirect sales channels, such as marketing relationships with banks and certified public accountants, among others.

ADP Chart

ADP data by YCharts

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of ADP – April 2018

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $52,257,064,073 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.06 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 47.42% Pass
6. Moderate PEmg Ratio PEmg < 20 32.42 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 13.31 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.06 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.95 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $3.64
MG Growth Estimate 3.96%
MG Value $59.67
Opinion Overvalued
MG Grade B-
MG Value based on 3% Growth $52.72
MG Value based on 0% Growth $30.91
Market Implied Growth Rate 11.96%
Current Price $117.89
% of Intrinsic Value 197.58%

Automatic Data Processing is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PEmg and PB ratios. The Enterprising Investor is only concerned with the low current ratio. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $2.88 in 2014 to an estimated $3.64 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 11.96% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Automatic Data Processing revealed the company was trading above its Graham Number of $28.47. The company pays a dividend of $2.24 per share, for a yield of 1.9% Its PEmg (price over earnings per share – ModernGraham) was 32.42, which was below the industry average of 32.93, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-2.85.

Automatic Data Processing performs fairly well in the ModernGraham grading system, scoring a B-.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$2.85
Graham Number $28.47
PEmg 32.42
Current Ratio 1.06
PB Ratio 13.31
Current Dividend $2.24
Dividend Yield 1.90%
Number of Consecutive Years of Dividend Growth 20

Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2017
Total Current Assets $39,350,000,000
Total Current Liabilities $37,250,900,000
Long-Term Debt $2,002,400,000
Total Assets $44,545,500,000
Intangible Assets $2,997,000,000
Total Liabilities $40,614,300,000
Shares Outstanding (Diluted Average) 443,700,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $4.03
Jun2017 $3.85
Jun2016 $3.25
Jun2015 $3.05
Jun2014 $3.14
Jun2013 $2.89
Jun2012 $2.82
Jun2011 $2.52
Jun2010 $2.40
Jun2009 $2.63
Jun2008 $2.34
Jun2007 $2.04
Jun2006 $2.68
Jun2005 $1.32
Jun2004 $1.18
Jun2003 $1.34
Jun2002 $1.75
Jun2001 $1.44
Jun2000 $1.31
Jun1999 $1.10
Jun1998 $0.98

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $3.64
Jun2017 $3.37
Jun2016 $3.10
Jun2015 $2.98
Jun2014 $2.88
Jun2013 $2.71
Jun2012 $2.60
Jun2011 $2.45
Jun2010 $2.42
Jun2009 $2.35
Jun2008 $2.11
Jun2007 $1.91
Jun2006 $1.78
Jun2005 $1.35
Jun2004 $1.38
Jun2003 $1.45
Jun2002 $1.44

Recommended Reading:

Other ModernGraham posts about the company

Automatic Data Processing Valuation – November 2016 $ADP
Automatic Data Processing Valuation – May 2016 $ADP
Automatic Data Processing Analysis – September 2015 Update $ADP
Automatic Data Processing Analysis – June 2015 Update $ADP
24 Companies in the Spotlight This Week – 3/28/15

Other ModernGraham posts about related companies

Fiserv Inc Valuation – April 2018 $FISV
Iron Mountain Inc Valuation – April 2018 $IRM
Cintas Corp Valuation – April 2018 $CTAS
Xerox Corp Valuation – March 2018 $XRX
Avery Dennison Corp Valuation – March 2018 $AVY
Ecolab Inc Valuation – March 2018 $ECL
Paychex Inc Valuation – March 2018 $PAYX
United Rentals Inc Valuation – September 2017 $URI
Exponent Inc Valuation – Initial Coverage $EXPO
ExlService Holdings Inc Valuation – Initial Coverage $EXLS

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

Automatic Data Processing Valuation – November 2016 $ADP

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy – August 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Automatic Data Processing (ADP) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Automatic Data Processing, Inc. (ADP) is a provider of human capital management (HCM) solutions to employers, offering solutions to businesses of various sizes. The Company also provides business process outsourcing solutions. Its segments include Employer Services and Professional Employer Organization (PEO) Services. The Employer Services segment offers a range of human resources (HR) business process outsourcing and technology-enabled HCM solutions. These offerings include payroll services, benefits administration, talent management, HR management, time and attendance management, insurance services, retirement services, and tax and compliance services. ADP TotalSource, ADP’s PEO business, offers small and mid-sized businesses a HR outsourcing solution through a co-employment model. As a PEO, ADP TotalSource provides HR management services while the client continues to direct the day-to-day job-related duties of the employees.

ADP Chart

ADP data by YCharts

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Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Recent valuations of the components of the Dow Jones Industrial Average are available for free members, including this one of Microsoft Corporation.  In addition, here is a post detailing what can be found within each individual company’s valuation.

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Downloadable PDF version of this valuation:

moderngraham-valuation-of-adp-november-2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $43,097,621,568 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.13 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 34.74% Pass
6. Moderate PEmg Ratio PEmg < 20 28.62 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 10.11 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.13 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.59 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

adp-value-chart-november-2016

EPSmg $3.30
MG Growth Estimate 3.22%
MG Value $49.29
Opinion Overvalued
MG Grade B-
MG Value based on 3% Growth $47.82
MG Value based on 0% Growth $28.03
Market Implied Growth Rate 10.06%
Current Price $94.39
% of Intrinsic Value 191.49%

Automatic Data Processing is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PEmg and PB ratios. The Enterprising Investor is only concerned with the low current ratio. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $2.71 in 2013 to an estimated $3.3 for 2017. This level of demonstrated earnings growth does not support the market’s implied estimate of 10.06% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Automatic Data Processing revealed the company was trading above its Graham Number of $27.68. The company pays a dividend of $2.12 per share, for a yield of 2.2%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 28.62, which was above the industry average of 21.38. Finally, the company was trading above its Net Current Asset Value (NCAV) of $0.08.

Automatic Data Processing performs fairly well in the ModernGraham grading system, scoring a B-.

Stage 3: Information for Further Research

adp-charts-november-2016

Net Current Asset Value (NCAV) $0.08
Graham Number $27.68
PEmg 28.62
Current Ratio 1.13
PB Ratio 10.11
Current Dividend $2.12
Dividend Yield 2.25%
Number of Consecutive Years of Dividend Growth 20

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Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 9/1/2016
Total Current Assets $30,124,200,000
Total Current Liabilities $26,719,300,000
Long-Term Debt $2,007,700,000
Total Assets $34,337,400,000
Intangible Assets $2,252,300,000
Total Liabilities $30,087,300,000
Shares Outstanding (Diluted Average) 455,300,000

Earnings Per Share History

Next Fiscal Year Estimate $3.63
Jun2016 $3.25
Jun2015 $3.05
Jun2014 $3.14
Jun2013 $2.89
Jun2012 $2.82
Jun2011 $2.52
Jun2010 $2.40
Jun2009 $2.63
Jun2008 $2.34
Jun2007 $2.04
Jun2006 $2.68
Jun2005 $1.32
Jun2004 $1.18
Jun2003 $1.34
Jun2002 $1.75
Jun2001 $1.44
Jun2000 $1.31
Jun1999 $1.10
Jun1998 $0.98
Jun1997 $0.85

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $3.30
Jun2016 $3.10
Jun2015 $2.98
Jun2014 $2.88
Jun2013 $2.71
Jun2012 $2.60
Jun2011 $2.45
Jun2010 $2.42
Jun2009 $2.35
Jun2008 $2.11
Jun2007 $1.91
Jun2006 $1.78
Jun2005 $1.35
Jun2004 $1.38
Jun2003 $1.45
Jun2002 $1.44
Jun2001 $1.24

Recommended Reading:

Other ModernGraham posts about the company

Automatic Data Processing Analysis – September 2015 Update $ADP
Automatic Data Processing Analysis – June 2015 Update $ADP
24 Companies in the Spotlight This Week – 3/28/15
Automatic Data Processing Quarterly Valuation – March 2015 $ADP
27 Companies in the Spotlight This Week – 12/20/14

Other ModernGraham posts about related companies

United Rentals Inc Valuation – August 2016 $URI
Robert Half International Inc Valuation – August 2016 $RHI
Accenture PLC Valuation – August 2016 $ACN
Fiserv Inc Valuation – August 2016 $FISV
Cintas Corporation Valuation – July 2016 $CTAS
Pitney Bowes Inc Valuation – July 2016 $PBI
Xerox Corp Valuation – June 2016 $XRX
Avery Dennison Corp Valuation – June 2016 $AVY
Ecolab Inc Valuation – June 2016 $ECL
Paychex Inc Valuation – June 2016 $PAYX

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

Automatic Data Processing Valuation – May 2016 $ADP

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Companies Benjamin Graham Would Invest In Today – March 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Automatic Data Processing (ADP) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Automatic Data Processing, Inc. (ADP) is a provider of human capital management (HCM) solutions and business process outsourcing. The Company operates through two segments: Employer Services and Professional Employer Organization (PEO) Services. The Employer Services segment offers a range of business outsourcing and technology-enabled HCM solutions. These offerings include payroll services, benefits administration, recruiting and talent management, human resources management, insurance services, retirement services and payment and compliance solutions. The Company’s PEO business, ADP TotalSource, offers small and mid-sized businesses human resources (HR) outsourcing solution through a co-employment model. ADP TotalSource includes HR management and employee benefits functions, including HR administration, employee benefits and employer liability management, into a single-source solution, including HR administration, employee benefits and employer liability management.

[level-free]

To read the details of this valuation, you must be logged in as a premium member. If you are not a premium member, please consider becoming one.

Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Here is a free sample valuation pdf, and here is a post detailing what can be found within each individual company’s valuation.

[/level-free]
[not-level-free]

Downloadable PDF version of this valuation:

ModernGraham Valuation of ADP – May 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $39,642,239,721 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.08 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 34.81% Pass
6. Moderate PEmg Ratio PEmg < 20 27.76 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 8.73 Fail
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.08 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.56 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

ADP value Chart May 2016

EPSmg $3.10
MG Growth Estimate 2.90%
MG Value $44.36
Opinion Overvalued
MG Grade B-
MG Value based on 3% Growth $44.97
MG Value based on 0% Growth $26.36
Market Implied Growth Rate 9.63%
Current Price $86.08
% of Intrinsic Value 194.06%

Automatic Data Processing is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PEmg and PB ratios. The Enterprising Investor is only concerned with the low current ratio. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $2.6 in 2012 to an estimated $3.1 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 9.63% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

Automatic Data Processing performs fairly well in the ModernGraham grading system, scoring a B-.

Stage 3: Information for Further Research

ADP Charts May 2016

Net Current Asset Value (NCAV) $0.43
Graham Number $26.87
PEmg 27.76
Current Ratio 1.08
PB Ratio 8.73
Current Dividend $2.04
Dividend Yield 2.37%
Number of Consecutive Years of Dividend Growth 20

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Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 3/1/2016
Total Current Assets $46,819,000,000
Total Current Liabilities $43,250,400,000
Long-term Debt $2,007,700,000
Total Assets $51,125,600,000
Intangible Assets $2,203,200,000
Total Liabilities $46,622,400,000
Shares Outstanding (Diluted Average) 456,900,000

Earnings Per Share History

Next Fiscal Year Estimate $3.26
6/1/2015 $3.05
6/1/2014 $3.14
6/1/2013 $2.89
6/1/2012 $2.82
6/1/2011 $2.52
6/1/2010 $2.40
6/1/2009 $2.63
6/1/2008 $2.34
6/1/2007 $2.04
6/1/2006 $2.68
6/1/2005 $1.79
6/1/2004 $1.56
6/1/2003 $1.68
6/1/2002 $1.75
6/1/2001 $1.44
6/1/2000 $1.31
6/1/1999 $1.10
6/1/1998 $0.99
6/1/1997 $0.88
6/1/1996 $0.79

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $3.10
6/1/2015 $2.98
6/1/2014 $2.88
6/1/2013 $2.71
6/1/2012 $2.60
6/1/2011 $2.45
6/1/2010 $2.42
6/1/2009 $2.39
6/1/2008 $2.20
6/1/2007 $2.07
6/1/2006 $2.02
6/1/2005 $1.68
6/1/2004 $1.60
6/1/2003 $1.56
6/1/2002 $1.44
6/1/2001 $1.24
6/1/2000 $1.10

Recommended Reading:

Other ModernGraham posts about the company

Automatic Data Processing Analysis – September 2015 Update $ADP
Automatic Data Processing Analysis – June 2015 Update $ADP
24 Companies in the Spotlight This Week – 3/28/15
Automatic Data Processing Quarterly Valuation – March 2015 $ADP
24 Companies in the Spotlight This Week – 3/28/15

Other ModernGraham posts about related companies

Robert Half International Inc Valuation – February 2016 $RHI
Accenture PLC Valuation – February 2016 $ACN
Cintas Corp Valuation – December 2015 Update $CTAS
Accenture PLC Valuation – February 2016 $ACN
Cintas Corp Valuation – December 2015 Update $CTAS
The Best Companies of the Business Support Industry – November 2015
Paychex Inc. Valuation – November 2015 Update $PAYX
Robert Half International Inc. Valuation – November 2015 Update $RHI
Alliance Data Systems Corporation Analysis – October 2015 Update $ADS
Automatic Data Processing Analysis – September 2015 Update $ADP

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

Automatic Data Processing Analysis – September 2015 Update $ADP

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Most Undervalued Companies for the Defensive Investor – August 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Automatic Data Processing Inc. (ADP) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Automatic Data Processing, Inc. (ADP) is a provider of human capital management (HCM) solutions and business process outsourcing. The Company operates through two segments: Employer Services and Professional Employer Organization (PEO) Services. The Employer Services segment offers a range of business outsourcing and technology-enabled HCM solutions. These offerings include payroll services, benefits administration, recruiting and talent management, human resources management, insurance services, retirement services and payment and compliance solutions. The Company’s PEO business, ADP TotalSource, offers small and mid-sized businesses human resources (HR) outsourcing solution through a co-employment model. ADP TotalSource includes HR management and employee benefits functions, including HR administration, employee benefits and employer liability management, into a single-source solution, including HR administration, employee benefits and employer liability management.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of ADP – September 2015

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $37,712,125,246 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.06 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 34.66% Pass
6. Moderate PEmg Ratio PEmg < 20 26.13 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 7.88 Fail
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.06 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.01 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

ADP value Chart September 2015

EPSmg $3.10
MG Growth Estimate 2.88%
MG Value $44.19
Opinion Overvalued
MG Value based on 3% Growth $44.92
MG Value based on 0% Growth $26.33
Market Implied Growth Rate 8.82%
Current Price $80.96
% of Intrinsic Value 183.20%

Automatic Data Processing Inc. qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned by the low current ratio, and the high PEmg and PB ratios, while the Enterprising Investor is only initially concerned by the low current ratio.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $2.60 in 2012 to an estimated $3.10 for 2016.  This level of demonstrated earnings growth does not support the market’s implied estimate of 8.82% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Automatic Data Processing Inc. (ADP)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Stage 3: Information for Further Research

ADP Charts September 2015

Net Current Asset Value (NCAV) $1.08
Graham Number $27.36
PEmg 26.13
Current Ratio 1.06
PB Ratio 7.88
Dividend Yield 2.41%
Number of Consecutive Years of Dividend Growth 20

 

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Useful Links:

ModernGraham tagged articles Morningstar
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Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Total Current Assets $28,809,200,000
Total Current Liabilities $27,113,700,000
Long-Term Debt $9,200,000
Total Assets $33,110,500,000
Intangible Assets $2,296,700,000
Total Liabilities $28,302,000,000
Shares Outstanding (Diluted Average) 468,300,000

Earnings Per Share History

Next Fiscal Year Estimate $3.25
Jun15 $3.05
Jun14 $3.14
Jun13 $2.89
Jun12 $2.82
Jun11 $2.52
Jun10 $2.40
Jun09 $2.63
Jun08 $2.34
Jun07 $2.04
Jun06 $2.68
Jun05 $1.79
Jun04 $1.56
Jun03 $1.68
Jun02 $1.75
Jun01 $1.44
Jun00 $1.31
Jun99 $1.10
Jun98 $0.99
Jun97 $0.88
Jun96 $0.79

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $3.10
Jun15 $2.98
Jun14 $2.88
Jun13 $2.71
Jun12 $2.60
Jun11 $2.45
Jun10 $2.42
Jun09 $2.39
Jun08 $2.20
Jun07 $2.07
Jun06 $2.02
Jun05 $1.68
Jun04 $1.60
Jun03 $1.56
Jun02 $1.44
Jun01 $1.24
Jun00 $1.10

Recommended Reading:

Other ModernGraham posts about the company

Automatic Data Processing Analysis – June 2015 Update $ADP
24 Companies in the Spotlight This Week – 3/28/15
27 Companies in the Spotlight This Week – 12/20/14
Automatic Data Processing Quarterly Valuation – March 2015 $ADP
Automatic Data Processing Quarterly Valuation – December 2014 $ADP

Other ModernGraham posts about related companies

Accenture PLC Analysis – September 2015 Update $ACN
Dun & Bradstreet Corp. Analysis – September 2015 Update $DNB
Cintas Corporation Analysis – August 2015 Update $CTAS
Apollo Education Group Inc. Analysis – Initial Coverage $APOL
Paychex Inc. Analysis – August 2015 Update $PAYX
Robert Half International Inc. Analysis – August 2015 Update $RHI
United Rentals Inc. Analysis – Initial Coverage $URI
Automatic Data Processing Analysis – June 2015 Update $ADP
Accenture plc Analysis – June 2015 Update $ACN
Fiserv Inc. Analysis – 2015 Annual Update $FISV

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

Automatic Data Processing Analysis – June 2015 Update $ADP

automatic-data-processing-logoAutomatic Data Processing (ADP) has shown some earnings growth over the last few years and pays a healthy dividend, which may garner some attention from prospective investors. In fact, many analysts who focus on dividend growth investing have the company on the radar as a potential investment, including Safe Dividend Stocks, Dividend Ladder, and Integrator. While dividend growth potential is a great qualitative item to utilize when making an investment decision, it is critical to first conduct a quantitative analysis of the company.

Benjamin Graham, the father of value investing, taught that the most important aspect to consider is whether the company is trading at a discount relative to its intrinsic value. It is through a thorough fundamental analysis that the investor is able to make a determination about a potential investment’s merits.

The model is inspired by the teachings of Benjamin Graham and considers numerous metrics intended to help the investor reduce risk levels. The first part of the analysis is to determine whether the company is suitable for the very conservative Defensive Investor or the less conservative Enterprising Investor, who is willing to spend a greater amount of time conducting further research.

In addition, Graham strongly suggested that investors avoid speculation in order to remove the subjective elements of emotion. This is best achieved by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another. By using the ModernGraham method, one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.

ADP Chart

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Defensive Investor – Must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise – Market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – Current ratio greater than 2 – FAIL
  3. Earnings Stability – Positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – Has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – Earnings per share has increased by at least one-third over the last 10 years, using three-year averages at the beginning and end of the period – FAIL
  6. Moderate PEmg (price over normalized earnings) Ratio – PEmg is less than 20 – FAIL
  7. Moderate Price-to-Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – Must pass at least 4 of the following 5 tests to be suitable for a Defensive Investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – Current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt-to-Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – Positive earnings per share for at least 5 years – PASS
  4. Dividend Record – Currently pays a dividend – PASS
  5. Earnings Growth – EPSmg greater than that 5 years ago – PASS

Valuation Summary

Key Data

Recent Price $84.80
MG Value $41.92
MG Opinion Overvalued
Value Based on 3% Growth $42.48
Value Based on 0% Growth $24.90
Market Implied Growth Rate 10.22%
NCAV $1.82
PEmg 28.95
Current Ratio 1.07
PB Ratio 7.76


Balance Sheet – March 2015

Current Assets $32,793,000,000
Current Liabilities $30,715,000,000
Total Debt $10,000,000
Total Assets $37,107,000,000
Intangible Assets $2,284,000,000
Total Liabilities $31,929,000,000
Outstanding Shares 474,000,000


Earnings Per Share

2015 (estimate) $2.91
2014 $3.14
2013 $2.89
2012 $2.82
2011 $2.52
2010 $2.40
2009 $2.63
2008 $2.34
2007 $2.04
2006 $2.68
2005 $1.32


Earnings Per Share – ModernGraham

2015 (estimate) $2.93
2014 $2.88
2013 $2.71
2012 $2.60
2011 $2.45
2010 $2.42


Dividend History

ADP Dividend Chart

Competitive Comparison

Automatic Data Processing is not very attractive when compared to some other companies in the Business Support industry. For example, aModernGraham valuation of Robert Half Incorporated (NYSE:RHI) indicates that company is suitable for the Enterprising Investor and fairly valued at the present time. On the other hand, Paychex Inc. (NASDAQ:PAYX) was found to be suitable for Enterprising Investors but significantly overvalued in its most recent ModernGraham valuation.

Conclusion

Automatic Data Processing passes the initial requirements of the Enterprising Investor but not the Defensive Investor. Specifically, the Defensive Investor is concerned by the low current ratio, insufficient earnings growth over the last ten years, and the high PEmg and PB ratios while the Enterprising Investor is only concerned by the low current ratio. As a result, all Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, it has grown its EPSmg (normalized earnings) from $2.45 in 2011 to an estimated $2.93 for 2015. This level of demonstrated growth does not support the market’s implied estimate for annual earnings growth of 10.22% over the next 7-10 years.

In recent years, the company’s actual growth in EPSmg has averaged around 3.9% annually, but the ModernGraham valuation model reduces the actual growth to a more conservative figure when making an estimate, and returns an estimate of intrinsic value well below the current price, indicating that Automatic Data Processing is overvalued at the present time.

Disclaimer:  The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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Automatic Data Processing Quarterly Valuation – March 2015 $ADP

automatic-data-processing-logoBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – March 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Automatic Data Processing (ADP) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Automatic Data Processing, Inc. (ADP) is a provider of human capital management solutions to employers and computing solutions to vehicle dealers. ADP operates through three business segments: Employer Services, Professional Employer Organization (PEO) Services and Dealer Services. Employer Services offers a range of business outsourcing and HCM solutions, including: Payroll Services, Benefits Administration, Talent Management, Human Resources Management, Time and Attendance Management, Insurance Services, Retirement Services and Tax, Compliance and Payment Solutions. ADP’s PEO business, called ADP TotalSource, integrates HR management and employee benefits functions, including HR administration, employee benefits, and employer liability management. Dealer Services provide dealer management systems, digital marketing/advertising solutions and other business management solutions.

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $87.81
MG Value $40.10
MG Opinion Overvalued
Value Based on 3% Growth $41.94
Value Based on 0% Growth $24.59
Market Implied Growth Rate 10.93%
NCAV $2.30
PEmg 30.36
Current Ratio 1.06
PB Ratio 7.68

Balance Sheet – December 2014

Current Assets $39,116,000,000
Current Liabilities $36,770,000,000
Total Debt $10,000,000
Total Assets $43,503,000,000
Intangible Assets $2,333,000,000
Total Liabilities $38,011,000,000
Outstanding Shares 480,300,000

Earnings Per Share

2015 (estimate) $2.80
2014 $3.14
2013 $2.89
2012 $2.82
2011 $2.52
2010 $2.40
2009 $2.63
2008 $2.34
2007 $2.04
2006 $2.68
2005 $1.32

Earnings Per Share – ModernGraham

2015 (estimate) $2.89
2014 $2.88
2013 $2.71
2012 $2.60
2011 $2.45
2010 $2.42

Dividend History

Conclusion:

Automatic Data Processing Inc. is suitable for the Enterprising Investor but not for the Defensive Investor.  The Defensive Investor is concerned by the low current ratio, insufficient earnings growth over the last ten years, and the high PEmg and PB ratios, while the Enterprising Investor is only concerned by the low current ratio.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities.  From a valuation side of things, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $2.45 in 2011 to only an estimated $2.89 for 2015.  This level of demonstrated growth does not support the market’s implied estimate of 10.93% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.

Be sure to check out previous ModernGraham valuations of Automatic Data Processing Inc. (ADP) for greater perspective!

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Automatic Data Processing Inc. (ADP)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Automatic Data Processing Inc. (ADP) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

Automatic Data Processing Quarterly Valuation – December 2014 $ADP

automatic-data-processing-logo

Automatic Data Processing is suitable for the Enterprising Investor, but not the Defensive Investor, who is concerned with the low current ratio, insufficient earnings growth over the last ten years and the high PEmg and PB ratios. The Enterprising Investor, on the other hand, is only concerned with the low current ratio. As a result, the Enterprising Investor should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

From a valuation side of things, the company has grown its EPSmg (normalized earnings) from $2.45 in 2011 to only an estimated $2.92 for 2015. This demonstrated growth does not support the market’s implied estimate of 9.93%. In fact, the demonstrated growth over the last several years is only 3.82% per year. The company would have to see a significant change in its level of growth in order to meet the market’s estimated growth level. As a result, the ModernGraham valuation model returns an estimate of intrinsic value below the market price at this time, and the company appears to be overvalued by the market.

Be sure to check out previous ModernGraham valuations of Automatic Data Processing for greater perspective!

Read the full valuation on Seeking Alpha!

ADP Chart

ADP data by YCharts

Disclaimer:  The author did not hold a position in Automatic Data Processing (ADP) at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

ModernGraham Valuation: Automatic Data Processing (ADP)

moneyCompany Profile (obtained from Google Finance): Automatic Data Processing, Inc. (ADP) is a provider of business outsourcing solutions. ADP offers a wide range of human resource, payroll, tax and benefits administration solutions from a single source. ADP is also a provider of integrated computing solutions to auto, truck, motorcycle, marine, recreational vehicle, and heavy equipment dealers throughout the world. The Company’s operating segments include: Employer Services, professional employer organization (PEO) Services, and Dealer Services. In October 2011, the Company acquired WALLACE – The Training Tax Credit Company. In January 2012, the Company acquired Indian payroll business of Randstad Holding NV. In April 2012, it acquired the human resource solutions subsidiary of SHPS, Inc. In June 2013, Automatic Data Processing, Inc. announced that it has acquired Payroll S.A.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $40.15
MG Opinion Overvalued
Value Based on 3% Growth $40.17
Value Based on 0% Growth $23.55
Market Implied Growth Rate 9.73%
NCAV -$4.68
PEmg 27.95
Current Ratio 0.96
PB Ratio 6.02

Balance Sheet – 9/30/2013 

Current Assets $21,035,800,000
Current Liabilities $21,899,400,000
Total Debt $14,200,000
Total Assets $29,481,300,000
Intangible Assets $3,734,800,000
Total Liabilities $23,288,500,000
Outstanding Shares 481,800,000

Earnings Per Share

2014 (estimate) $2.89
2013 $2.80
2012 $2.82
2011 $2.52
2010 $2.40
2009 $2.63
2008 $2.20
2007 $1.83
2006 $1.85
2005 $1.79
2004 $1.56
2003 $1.68

Earnings Per Share – Modern Graham 

2014 (estimate) $2.77
2013 $2.68
2012 $2.59
2011 $2.42
2010 $2.31
2009 $2.20

Conclusion:

Automatic Data Processing fails to qualify for either the Defensive Investor or the Enterprising Investor.  The company currently trades at a high PEmg ratio and a high PB ratio, but the most significant issue with the company is the level of current liabilities.  Presently, the company has more current liabilities than current assets, leading to disqualification from contention for the Enterprising Investor.  While many people claim that the current ratio is not as important today, the fact remains that a company with a strong current ratio is in a better financial position than a company with a poor current ratio.  As a result, a poor current ratio indicates increased risk, which Intelligent Investors seek to avoid when possible.  We are looking for low risk, high reward opportunities, so any increased level of risk makes us wary.  As for the valuation, the company has grown EPSmg (normalized earnings) from $2.20 in 2009 to an estimated $2.77 for 2014.  This is a very moderate level of growth, and in stark contrast to the 9.73% growth rate implied by the market at this time.  Consequently, the market’s price is not supported by historical earnings performance and the company appears to be overvalued.

What do you think?  Do you agree that Automatic Data Processing overvalued?  Is the company not suitable for either Defensive Investors or Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Automatic Data Processing (ADP) at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill

Jack Henry & Associates Inc Valuation – April 2019 #JKHY

Company Profile (excerpt from Reuters): Jack Henry & Associates, Inc., incorporated on October 4, 1985, is a provider of information processing solutions for community banks. The Company offers a range of products and services, including processing transactions, automating business processes, and managing information financial institutions and diverse corporate entities. The Company operates in two segments, which include bank systems and services (Bank) and credit union systems and services (Credit Union). The Company provides its products and services through approximately three business brands, which include Jack Henry Banking, Symitar and ProfitStars. The Core software system consists of the integrated applications required to process deposit, loan, and general ledger transactions, and to maintain centralized customer/member information. Jack Henry Banking markets over three core software systems to banks and Symitar markets over two core software systems to credit unions. The Company’s subsidiaries include Jack Henry Services, Inc., Jack Henry Software/Commlink, Inc., Symitar Systems, Inc., Check Collect, Inc. and Bayside Business Solutions, Inc.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of JKHY – April 2019

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $10,937,524,534 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.07 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 142.89% Pass
6. Moderate PEmg Ratio PEmg < 20 38.72 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 7.88 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.07 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.00 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $3.66
MG Growth Estimate 10.26%
MG Value $106.22
Opinion Overvalued
MG Grade C+
MG Value based on 3% Growth $53.07
MG Value based on 0% Growth $31.11
Market Implied Growth Rate 15.11%
Current Price $141.73
% of Intrinsic Value 133.43%

Jack Henry & Associates, Inc. is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PEmg and PB ratios. The Enterprising Investor is only concerned with the low current ratio. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $2.17 in 2015 to an estimated $3.66 for 2019. This level of demonstrated earnings growth does not support the market’s implied estimate of 15.11% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Jack Henry & Associates, Inc. revealed the company was trading above its Graham Number of $35.7. The company pays a dividend of $1.36 per share, for a yield of 1% Its PEmg (price over earnings per share – ModernGraham) was 38.72, which was above the industry average of 32.68. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-2.81.

Jack Henry & Associates, Inc. receives an average overall rating in the ModernGraham grading system, scoring a C+.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$2.81
Graham Number $35.70
PEmg 38.72
Current Ratio 1.07
PB Ratio 7.88
Current Dividend $1.36
Dividend Yield 0.96%
Number of Consecutive Years of Dividend Growth 20

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2018
Total Current Assets $362,639,000
Total Current Liabilities $340,074,000
Long-Term Debt $0
Total Assets $1,971,777,000
Intangible Assets $1,113,794,000
Total Liabilities $579,822,000
Shares Outstanding (Diluted Average) 77,409,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $3.45
Jun2018 $4.85
Jun2017 $3.14
Jun2016 $3.12
Jun2015 $2.59
Jun2014 $2.19
Jun2013 $1.94
Jun2012 $1.74
Jun2011 $1.59
Jun2010 $1.38
Jun2009 $1.22
Jun2008 $1.16
Jun2007 $1.14
Jun2006 $0.96
Jun2005 $0.81
Jun2004 $0.68
Jun2003 $0.55
Jun2002 $0.62
Jun2001 $0.61
Jun2000 $0.40
Jun1999 $0.38

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $3.66
Jun2018 $3.57
Jun2017 $2.82
Jun2016 $2.54
Jun2015 $2.17
Jun2014 $1.90
Jun2013 $1.69
Jun2012 $1.52
Jun2011 $1.37
Jun2010 $1.23
Jun2009 $1.13
Jun2008 $1.04
Jun2007 $0.93
Jun2006 $0.79
Jun2005 $0.68
Jun2004 $0.61
Jun2003 $0.55

Recommended Reading:

Other ModernGraham posts about the company

Jack Henry & Associates Inc Valuation – August 2018 $JKHY
Jack Henry & Associates Inc Valuation – Initial Coverage $JKHY

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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