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
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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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