ADP subsequently submitted a more complete quarterly report in a 10-Q filed with the SEC.
We learned from the 10-Q that ADP revised the way it accounts for funds held for clients and client fund obligations. For example, changes in client fund obligations have been moved from the Investing to the Financing section of the Cash Flow Statement. This seemingly arcane reclassification involves big numbers -- $6.2 billion for the nine months ending March 2007 -- and makes some elements of new Cash Flow Statements incomparable with historic results.
We now use Net Cash Used in Investing Activities (instead of Free Cash Flow) to compute the Accrual Ratio, which is an indication of Earnings Quality. Misleading ratio values would result if we were to use Cash Flow figures determined with radically different classification rules. While ADP provided restated figures for some prior periods, they didn't come close to covering the 60 quarters of data we have amassed for ADP. Therefore, for the current analysis, we adjusted the newly reported Cash Flow figures to comply the older classification.
The additional data in the 10-Q changed, as shown below, the gauge scores from those we computed using ADP's preliminary report.
- Cash Management: 13 of 25 (down from 16)
- Growth: 18 of 25 (up from 16)
- Profitability: 15 of 25 (up from 10)
- Value: 13 of 25 (up from 11)
- Overall: 56 of 100 (up from 50)
Cash Management. This gauge decreased from 16 points in December to 13 points now.
| March 2008 | 3 mos. ago | 12 mos. ago | |
| Current Ratio | 1.8 | 1.8 | 2.3 |
| LTD/Equity | 1.0% | 0.7% | 0.7% |
| Debt/CFO | 0.0 yrs | 0.0 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) | 44.6 days | 51.6 days | 51.9 days |
| Working Capital/Market Capitalization | 6.9% | 5.7% | 8.5% |
| Cash Conversion Cycle Time (CCCT) | 34.7 days | 38.2 days | 36.7 days |
Debt is a non-factor for this AAA company, and cash management efficiency has improved when judged by DSO and CCCT.
Growth. This gauge didn't change from 18 points in December.
| March 2008 | 3 mos. ago | 12 mos. ago | |
| Revenue growth | 13.3% | 13.5% | 3.8% |
| Revenue/Assets | 97% | 101% | 85% |
| CFO growth | 2.4% | -0.8% | -23.3% |
| Net Income growth | 16.6% | 17.7% | 0.2% |
The Growth metrics have improved dramatically relative to last year's values, but there might have been some deceleration in the last quarter. Encouragingly, Cash Flow growth turned positive. Net income for the trailing four quarters benefited from a decrease in the effective income tax rate from 37.7 to 36.0 percent.
Profitability. This gauge decreased from 16 points in December to 15 points now.
| March 2008 | 3 mos. ago | 12 mos. ago | |
| Operating Expenses/Revenue | 80.1% | 80.3% | 81.2% |
| ROIC | 27.9% | 26.9% | 24.9% |
| FCF/Equity | 23.8% | 23.5% | 21.0% |
| Accrual Ratio | -3.8% | -10.7% | -20.0% |
Operating expenses edged down by more than a percentage point in the last year, leading to higher returns. The improved rate of Free Cash Flow as a percentage of Equity is impressive. It's good that the Accrual Rate is negative, but we'd prefer it to be decreasing.
Value. ADP's stock price slipped from $44.53 to $42.39 during the first quarter of the year -- it has since recovered a portion of the decline. The Value gauge, based on the quarter-end closing price, moved up from 8 to 13 points.
| March 2008 | 3 mos. ago | 12 mos. ago | |
| P/E | 19.6 | 21.8 | 27.9 |
| P/E to S&P 500 average P/E | 118% | 122% | 176% |
| Price/Revenue | 2.6 | 2.8 | 3.6 |
| Enterprise Value/Cash Flow (EV/CFO) | 13.8 | 16.0 | 16.8 |
ADP shares appear to hold good value.
With the 10-Q Balance Sheet and Cash Flow data, the Overall gauge increased to 56 of 100 points, its highest reading in more than 4 years. All four individual gauges have double digits scores on a scale of 0 to 25.
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