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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.

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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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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
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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.

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