We have since mined the financial statements in ADP's earnings announcement to update the metrics we use to assess Cash Management, Growth, Profitability and Value. This post reports on these metrics and the Financial Gauge scores.
The Balance Sheet included in the earnings announcement was condensed, and a Cash Flow Statement through June has not yet been published. To compute GCFR gauge scores, we had to estimate some data that the company has not yet made available.
We will adjust the results after ADP files a 10-K report with the SEC.
In the mean time, ADP's preliminary GCFR gauge scores are as follows:
- Cash Management: 10 of 25 (unchanged from March)
- Growth: 6 of 25 (down from 14)
- Profitability: 17 of 25 (up from 15)
- Value: 19 of 25 (up from 17)
- Overall: 61 of 100 (up from 59)
The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary.
| Cash Management | Jun 2009 | Mar 2009 | Jun 2008 | 5-Yr Avg |
| Current Ratio (1) | 1.6 | 1.7 | 1.7 | 1.7 |
| LTD/Equity | 0.8% | 0.9% | 1.0% | 1.1% |
| Debt/CFO (years) (2) | 0.5 | 0.0 | 0.0 | 0.1 |
| Inventory/CGS (days) | N/A | N/A | N/A | N/A |
| Finished Goods/Inventory | N/A | N/A | N/A | N/A |
| Days of Sales Outstanding (days) | 44.6 | 45.2 | 43.2 | 49.5 |
| Working Capital/Invested Capital (1) | 40.0% | 37.8% | 37.7% | 41.8% |
| Cash Conversion Cycle Time (days) | 34.1 | 36.4 | 31.4 | 34.9 |
| Gauge Score (0 to 25) | 10 | 10 | 9 | 14 |
2. CFO in the June 2009 quarter was estimated.
This AAA company has $2.3 billion in Cash and Short-term investments and very little long-term debt. ADP's Working Capital -- the difference between Current Assets and Current Liabilities -- is about $1.5 billion. (We exclude client funds when making this calculation.)
As of 30 June 2009, ADP had a new item on its Balance Sheet: a short-term $730 million "obligation under commercial paper borrowing." The obligation was met on 1 July 2009. This is a reminded that the ratios we calculate so diligently can rise or fall based on the calendar.
| Growth | Jun 2009 | Mar 2009 | Jun 2008 | 5-Yr Avg |
| Revenue growth (1) | 1.0% | 4.6% | 12.5% | 3.4% |
| Revenue/Assets (2) | 99.6% | 105.6% | 106.9% | 90.8% |
| Operating Profit growth | 14.5% | 9.2% | 6.3% | 7.0% |
| CFO growth (1,3) | -12.6% | 8.4% | 36.5% | 12.9% |
| Net Income growth (1) | 14.4% | 6.9% | 13.8% | 15.0% |
| Gauge Score (0 to 25) | 6 | 14 | 19 | 9 |
2. Assets excludes Funds held for clients
3. CFO in the June 2009 quarter was estimated.
Revenue Growth has continued to decline, which is not surprising during a recession for a company that provides payroll services. Unfavorable foreign exchange rates have exacerbated this situation.
The upticks in the Net Income and Operating Profit growth rates were the result of large tax settlements in the recent quarter. The tax benefit went right to the company's bottom line, and it also lowered the effective tax rate used in the Operating Profit calculation.
We await a 10-K with actual Cash Flow data.
| Profitability | Jun 2009 | Mar 2009 | Jun 2008 | 5-Yr Avg |
| Operating Expenses/Revenue | 79.4% | 79.8% | 80.3% | 80.3% |
| ROIC | 34.7% | 30.7% | 31.9% | 27.0% |
| Free Cash Flow/Invested Capital (1) | 37.9% | 38.4% | 45.8% | 36.3% |
| Accrual Ratio (1) | -5.6% | -0.3% | 3.9% | -3.2% |
| Gauge Score (0 to 25) | 17 | 15 | 15 | 15 |
Operating Expenses have been stable, perhaps slightly decreasing, when assessed on a trailing four quarters basis. The high ROIC is comforting, although it received a boost from the one-time tax benefit. The figures shown for the last two Profitability metrics were calculated with estimated Cash Flow data; they are likely to change.
| Value | Jun 2009 | Mar 2009 | Jun 2008 | 5-Yr Avg |
| P/E | 13.4 | 14.6 | 17.6 | 20.2 |
| P/E vs. S&P 500 P/E | 0.6 | 0.8 | 1.0 | 1.2 |
| PEG | 0.9 | 1.6 | 2.8 | 3.2 |
| Price/Revenue | 2.0 | 2.0 | 2.5 | 3.1 |
| Enterprise Value/Cash Flow (EV/CFO) (1) | 10.5 | 10.1 | 11.4 | 14.1 |
| Gauge Score (0 to 25) | 19 | 17 | 14 | 7 |
The price of ADP shares increased only slightly in the June quarter, from $35.16 to $35.44. The share price was $41.90 on 30 June 2008.
ADP's valuation ratios can be compared with other companies in the Business Software and Services industry.
| Overall | Jun 2009 | Mar 2009 | Jun 2008 | 5-Yr Avg |
| Gauge Score (0 to 100) | 61 | 59 | 57 | 44 |
In summary, ADP's Growth has weakened (no surprise) considerably in the last year. Improvements by other measures and a lower share price kept the Overall gauge stable with a slight tailwind.
However, the results would be a little less attractive if the $120 million tax benefit in the June 2009 quarter were to be excluded. The Overall Gauge score would lose six points to 55.
Because we don't yet have a complete set of financial statements for the June 2009 period, it will be important for us to re-assess the analysis findings when a 10-K is filed.
Full disclosure: Long ADP at time of writing.
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