A previous article examined ADP's Income Statement for the September quarter. Reported earnings were $0.02 more than our $0.60 EPS estimate.
We have now updated the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value. This post reports on the metrics for ADP and the associated financial gauge scores. The metrics were calculated using data from ADP's current and historical financial statements, including those in the latest 10-Q.
Before getting into the details, we will take a step back to introduce the subject of today's analysis.
ADP is one of four remaining U.S. companies with a AAA bond rating. An S&P 500 Dividend Aristocrat, ADP recently announced its 36th-consecutive annual dividend increase.
The company's market value is currently close to $25 billion, on a fully diluted basis.
As the processor of many payrolls across the U.S., ADP quickly senses macroeconomic changes in Employment.
Fortune Magazine deemed ADP to be Most Admired in the Financial Data Services industry.
In fiscal 2010, which ended 30 June, ADP's earnings fell to $1.21 billion from $1.33 billion in the prior year. Revenue increased to $8.93 billion from $8.84 billion. The company's results in fiscal 2010 were weakened by high unemployment, which reduces the demand for payroll services, and low interest rates, which limits the company's interest income.
ADP has three main businesses: Employer Services, Professional Employer Organization Services, and Dealer Services. Employer Services processes payrolls, administers benefits, and performs other services to enable firms "to staff, manage, pay and retain their employees."
The Employer Services business segment contributed 72 percent of total revenue in fiscal 2010. Competitors include Paychex (NASDAQ:PAYX), the now-private Ceridian, and India's Wipro (NYSE: WIT).
ADP has recently acquired several other companies, including Italian business software developer Byte Software House, automotive marketing firm Cobalt, human resource solutions provider Workscape, and payroll tax firm MasterTax.
Now we turn to the financial gauges. The latest quarterly results produced the following changes to the scores:
- Cash Management: 11 of 25 (up from 9 in September)
- Growth: 5 of 25 (down from 15)
- Profitability: 12 of 25 (down from 13)
- Value: 0 of 25 (down from 3)
- Overall: 25 of 100 (down from 33)
The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary. Readers are encouraged to verify these figures and calculate others as they see fit using the filings available at the SEC's web site and elsewhere.
| Cash Management | 31 Dec 2010 | 30 Sep 2010 | 31 Dec 2009 | 5-Yr Avg |
| Current Ratio (1) | 1.7 | 1.6 | 2.0 | 1.8 |
| LTD to Equity | 0.6% | 0.6% | 0.7% | 0.9% |
| Debt/CFO (years) | 0.0 | 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) | 44.5 | 44.3 | 44.5 | 47.3 |
| Working Capital/Revenue (1) | 17.0% | 18.0% | 17.3% | 20.3% |
| Cash Conversion Cycle Time (days) | 34.8 | 34.8 | 35.2 | 34.9 |
| Gauge Score (0 to 25) | 11 | 9 | 10 | 12 |
| 1. Excludes Funds held for clients and Client funds obligations. |
The Cash Management gauge score picked up a couple of points due to some minor variations in the underlying financial metrics.
Working Capital -- the difference between Current Assets and Current Liabilities, but excluding client funds and obligations -- is also approximately $1.3 billion. The amount of Working Capital relative to Revenue is stable-to-decreasing, which is good.
The Current Ratio, also excluding client funds, is under the classical 2.0 threshold. However, the latest figure is within its normal range for ADP.
Days of Sales Outstanding has been static for the last year. The figure is below (albeit slightly) its long-term average, which is signal of improved cash efficiency. We'd like to see the Cash Conversion Cycle Time move down, for the same reason.
| Growth | 31 Dec 2010 | 30 Sep 2010 | 31 Dec 2009 | 5-Yr Avg |
| Revenue Growth | 5.8% | 3.3% | -2.8% | 5.3% |
| Revenue/Assets (1) | 104.3% | 101.5% | 103.2% | 97.1% |
| Operating Profit Growth | 3.5% | 5.3% | 13.2% | 8.3% |
| CFO Growth | 6.6% | 17.9% | -16.3% | 3.4% |
| Net Income Growth | -11.1% | -9.8% | 11.5% | -5.9% |
| Gauge Score (0 to 25) | 5 | 15 | 5 | 10 |
| Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters. The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.Growth |
| 1. Assets excludes Funds held for clients. |
The Growth gauge jumped abnormally with September's results because the growth metrics were so much better than they had been in September 2009. The numbers moderated in December, and the score gave back its gain.
The upward trend in Revenue/Assets may be moderating. Note that we exclude Client funds from Assets when making the Revenue/Assets calculation.
The negative (and worsening) Net Income trailing-year growth rate is one drag on the Growth gauge score. Although macroeconomic factors such as U.S. employment and interest rates probably has the most prominent effect on income, one-time items have also weakened ADP's results. For example, ADP recorded an $8.6 million impairment charge on assets held for sale. Similarly, in the June 2010 quarter, ADP recorded a $9.1 million impairment charge on securities.
In addition, ADP's income in the prior year benefited for a tax settlement, which makes the more recent results look comparatively worse.
Cash Flow from operations during the first six month of the current fiscal year is 3.8 percent less than in the same six months of the previous fiscal year.
| Profitability | 31 Dec 2010 | 30 Sep 2010 | 31 Dec 2009 | 5-Yr Avg |
| Operating Expense/Revenue | 81.0% | 80.6% | 79.1% | 80.4% |
| ROIC | 26.8% | 26.4% | 34.3% | 27.2% |
| Free Cash Flow/Invested Capital | 36.0% | 35.9% | 37.9% | 35.3% |
| Accrual Ratio | 16.7% | 10.5% | -10.2% | 0.2% |
| Gauge Score (0 to 25) | 12 | 13 | 17 | 15 |
A decreasing Operating Margin (albeit slightly) is not helping the score. The decrease indicates that expenses are taking a bigger bite out of each revenue dollar.
The ROIC and FCF/IC ratios are healthy and consistent with their historical averages.
The increase in the Accrual Ratio could be a concern. However, one-time items that have affected Cash Flow and Income have made this metric especially erratic. We'd like to see the Accrual Ratio decrease and get back under 0 percent.
| Value | 31 Dec 2010 | 30 Sep 2010 | 31 Dec 2009 | 5-Yr Avg |
| P/E | 19.2 | 17.3 | 16.0 | 17.6 |
| P/E vs. S&P 500 P/E | 1.3 | 1.2 | 0.8 | 1.0 |
| PEG | 5.5 | 3.3 | 1.2 | 4.2 |
| Price/Sales | 2.5 | 2.3 | 2.5 | 2.8 |
| Enterprise Value/Cash Flow (EV/CFO) | 13.1 | 11.8 | 12.8 | 14.1 |
| Gauge Score (0 to 25) | 0 | 3 | 7 | 8 |
| Share Price ($) | $46.28 | $42.03 | $42.82 | - |
The results on a per-share basis are somewhat better because ADP has been repurchasing its shares.
The company's earnings growth would not seem to justify the current P/E multiple. However, it seems likely that ADP's share price has increased because investors are more confident that improving employment trends will ultimately benefit ADP's payroll business. The GCFR gauges won't register this improvement until after it actually occurs.
| Overall | 31 Dec 2010 | 30 Sep 2010 | 31 Dec 2009 | 5-Yr Avg |
| Gauge Score (0 to 100) | 25 | 33 | 42 | 45 |
The Overall gauge score tumbled mostly because of weakness in the Growth and Value gauges. The score will remain under pressure until key parameters such as Operating Income, Net Income, Cash Flow from Operations perform better.
As mentioned above, one-time items have skewed some of the numbers. The effect of these factors should become clearer over time.
Full disclosure: Long ADP at time of writing.
Posts
No comments:
Post a Comment