To update the Gauges, we had to make various numerical assumptions because the Balance Sheet in ADP's press release was abbreviated and the Cash Flow Statement was omitted. We will recompute the gauge scores after the company files a 10-Q with complete financial statements and notes.
Automatic Data Processing, Inc. provides payroll and other personnel-related information technology services to well over 500,000 employers worldwide. It competes with firms such as Paychex, Inc. (NASDAQ:PAYX). ADP is one of a mere handful of U.S. companies with a AAA bond rating, and it is an S&P 500 Dividend Aristocrat. The company is also known for the monthly ADP National Employment Report on non-farm private employment.
ADP changed its share listing in October 2008 from the New York Stock Exchange (NYSE: NYX) to the NASDAQ Stock Market (NASDAQ: NDAQ). The company retained its eponymous three-character ticker symbol.
In 2007, ADP divested its Brokerage Services Group business, which became Broadridge Financial Solutions (NYSE: BR).
As a payroll processor, decreased employment in the U.S. will put pressure on ADP. However, the company demonstrated its confidence in the future by raising its dividend 14 percent. ADP has hiked the dividend for 34 consecutive years.
Three months ago, after the September quarter (the first quarter of ADP's fiscal 2009), the GCFR Overall Gauge of ADP increased to 57 of the 100 possible points. Our initial and updated analysis reports explained this score in some detail. Please be aware that tweaks to our algorithms changed some previously reported scores by small amounts.
Of the individual gauges contributing to September's composite result, Growth (surprisingly?) led the way with 20 of the 25 possible points. The Cash Management gauge registered the greatest change in this quarter, rising from 8 to a strong 17 points. The contrary Value gauge, which tends to move in the opposite direction of the share price, was also attractive.
Now, with the available and assumed data for the December 2008 quarter, our gauges display the following scores:
- Cash Management: down of 25 (up from 17 in September)
- Growth: 19 of 25 (down from 20)
- Profitability: 12 of 25 (down from 13)
- Value: 12 of 25 (down from 13)
- Overall: 52 of 100 (down from 57)
These scores will be recalculated when the 10-Q is submitted.
Before we examine the factors that affected each gauge, we will compare the latest quarterly Income Statement to our previously communicated expectations.
Please note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.
http://sheet.zoho.com/public/ncarvin/adp-income-statement?mode=html
Revenue grew by 2.5 percent, when compared to the December 2007 quarter. The actual figure was 4.7 percent greater than our estimate, which assumed Revenue would slip by 2.1 percent. Revenue in the last four quarters was 8.5 percent more than in the prior four quarters.
The Cost of Goods Sold (CGS) -- what ADP calls "Operating Expenses" -- was 45.7 percent of Revenue, which translates into a Gross Margin of 54.3 percent. This slightly exceeded our estimate of a 54-percent Gross Margin. The margin was 54.4 percent in the year-earlier quarter.
Depreciation and amortization expenses were 2.6 percent of Revenue. The amount was just shy of our $60 million per quarter estimate.
Research and Development (R&D) expenses ("Systems Development and Programming Costs") were 5.6 percent of Revenue. These expenses were a little below our target.
On the other hand, Sales, General, and Administrative (SG&A) expenses, at 26.0 percent of Revenue, were somewhat greater than our 24.5 percent estimate.
Better-than-expected Revenue overcame and the higher-than-expected SG&A expenses, resulting in Operating Income for the quarter 3 percent greater than our forecast. Operating Income, as we define it, was 3.6 percent greater than the amount attained in December 2007.
Non-operating income was $11 million above our target value. The effective Income Tax Rate in the recent quarter was 36.5 percent, compared to the predicted 36.0 percent.
Net Income from continuing operations was 2.7 percent above the level attained a year ago, whereas we had expected Net Income to slip by 1 percent. When measured on a per-share basis, earnings grew at a more impressive 7.3 percent. ADP reduced the number of shares outstanding, on a diluted basis, by 4.5 percent.
The Net Income growth rate would have been a little higher had not there been "a favorable settlement of a state tax matter" in the year-earlier quarter.
| Cash Management | December 2008 | 3 months ago | 12 months ago |
| Current Ratio | 1.6 | 1.4 | 1.8 |
| LTD/Equity | 1.1% | 0.8% | 0.7% |
| Debt/CFO | 0.5 yrs | 0.7 yrs | 0.0 yrs |
| Inventory/CGS | N/A | N/A | N/A |
| Finished Goods/Inventory | N/A | N/A | N/A |
| Days of Sales Outstanding (DSO) | 44.8 days | 39.7 days | 51.6 days |
| Working Capital/Market Capitalization | 6.0% | 5.7% | 5.7% |
| Cash Conversion Cycle Time (CCCT) | 37.6 days | 30.9 days | 38.2 days |
| Gauge Score (0 to 25) | 12 | 17 | 16 |
This AAA company has almost no debt, relative to equity and cash flow.
Small changes in Days of Sales Outstanding and Days of Payables Outstanding (not shown in table) were the reason the score dropped 5 points.
| Growth | December 2008 | 3 months ago | 12 months ago |
| Revenue growth | 8.5% | 11.6% | 13.5% |
| Revenue/Assets | 110% | 102% | 93% |
| CFO growth | 38% (est.) | 34.6% | -0.8% |
| Net Income growth | 11.2% | 15.1% | 17.7% |
| Gauge Score (0 to 25) | 19 | 20 | 18 |
Given current economic conditions, it isn't surprising that ADP's Revenue growth has slowed. (The company forecasts Revenue growth between 2 and 3 percent in fiscal 2009.) We anxiously await the Cash Flow statement to see if CFO growth was as robust as estimated. The steady decline in the growth rate for Net income is a significant concern, but not surprising in the current environment.
| Profitability | December 2008 | 3 months ago | 12 months ago |
| Operating Expenses/Revenue | 80.1% | 80.2% | 80.3% |
| ROIC | 26.0% | 34.1% | 27.0% |
| FCF/Equity | 35% (est) | 34.6% | 21.9% |
| Accrual Ratio | 17% (est) | +8.2% | -9.7% |
| Gauge Score (0 to 25) | 12 | 13 | 18 |
Operating Expenses have been extremely stable when assessed on a trailing four quarters basis. The high ROIC is comforting. We don't have the Cash Flow data needed to determine the exact values for two of the key Profitability metrics.
| Value | December 2008 | 3 months ago | 12 months ago |
| P/E | 16.3 | 18.1 | 20.1 |
| P/E to S&P 500 average P/E | 121% | 101% | 113% |
| Price/Revenue | 2.2 | 2.4 | 2.8 |
| Enterprise Value/Cash Flow (EV/CFO) | 10.1 (est) | 10.8 | 16.0 |
| Gauge Score (0 to 25) | 12 | 13 | 7 |
The price of ADP shares decreased from $42.75 to $39.34 during the December quarter. The Value gauge score in the table above is based on the price when the quarter ended, which is our standard practice.
The valuation ratios can be compared with other companies in the Business Software and Services industry.
While ADP's P/E has been trimmed, its premium relative to the S&P 500 has increased. In other words, ADP has retained more of its value than many other companies. This might indicate that ADP has benefited from some flight-to-safety buying.
| Overall | December 2008 | 3 months ago | 12 months ago |
| Gauge Score (0 to 100) | 52 | 57 | 54 |
ADP surprised us with positive (if modest) Revenue and Net Income growth in the quarter, whereas we expected small declines. The company's Balance Sheet appears AAA. The current Overall gauge score is good, although not high enough to trigger any excitement. Because the preliminary financial statements were incomplete, we will need to re-assess the analysis findings when a 10-Q is filed with the SEC.
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