ADP has since filed a 10-K annual report with the SEC, and we have updated the GCFR analysis to incorporate the data that hadn't previously been disclosed.
Automatic Data Processing, Inc. (NYSE: ADP) is a top provider of payroll and other personnel-related information technology services. 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 publishes the monthly ADP National Employment Report on non-farm private employment, and it competes with firms such as Paychex, Inc. (NASDAQ:PAYX). Last year, ADP divested its Brokerage Services Group business, which became Broadridge Financial Solutions (NYSE: BR). (ADP continues to provide services to Broadridge in the same capacity it had prior to the spinoff.)
ADP made two changes to the way it accounts for client funds and obligations. The first change, which doesn't concern us, reclassifies these amounts as Current Assets and Current Liabilities. The second change moves the net increase in Client Fund Obligations from the Investing to the Financing section of the Cash Flow Statement. This arcane but big-dollar change -- $3.5 billion in the last fiscal year -- significantly alters the Net Cash Used in Investing Activities. We use this figure to compute the Accrual Ratio, which is an indicator of Earnings Quality and Profitability. For consistency with historical data, we adjusted the newly reported Cash Flow figures to comply the older classification.
With the additional data in the 10-K changed, our gauges now display the following scores.
- Cash Management: 8 of 25 (down from 13 after the March quarter)
- Growth: 20 of 25 (up from 18)
- Profitability: 12 of 25 (down from 15)
- Value: 16 of 25 (up from 13)
- Overall: 54 of 100 (down from 57)
The new information didn't change our evaluation of the latest quarter's Income Statement, including the comparison with our previously communicated expectations.
Cash Management. This gauge decreased from 13 points in March to 8 points now.
| June 2008 | 3 mos. ago | 12 mos. ago | |
| Current Ratio | 1.7 | 1.8 | 1.9 |
| LTD/Equity | 1.0% | 1.0% | 0.8% |
| 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) | 43.2 days | 44.6 days | 42.3 days |
| Working Capital/Market Capitalization | 6.2% | 6.9% | 5.9% |
| Cash Conversion Cycle Time (CCCT) | 31.4 days | 34.7 days | 28.7 days |
Debt is a non-factor for this AAA company, but cash management efficiency may have slipped an iota when judged by DSO and CCCT.
The 10-K proudly reports that ADP's "investment portfolio does not contain any asset-backed securities with underlying collateral of sub-prime mortgages or home equity loans, collateralized debt obligations (CDOs), collateralized loan obligations (CLOs), credit default swaps, asset-backed commercial paper, auction rate securities, structured investment vehicles or non-investment-grade securities."
Growth. This gauge increased from 18 points in March to 20 points now.
| June 2008 | 3 mos. ago | 12 mos. ago | |
| Revenue growth | 12.5% | 13.3% | 13.2% |
| Revenue/Assets | 104% | 97% | 98% |
| CFO growth | 36.5% | 2.4% | -28.4% |
| Net Income growth | 13.8% | 16.6% | 19.1% |
Most of the Growth metrics improved, especially Cash Flow from Operations which jumped in the June quarter. Increasing Revenue/Assets is also a welcome result. Net Income for the trailing four quarters benefited from a decrease in the effective income tax rate from 37.1 to 35.9 percent.
Profitability. This gauge decreased from 15 points in March to 12 point now.
| June 2008 | 3 mos. ago | 12 mos. ago | |
| Operating Expenses/Revenue | 80.3% | 80.1% | 80.7% |
| ROIC | 26.2% | 27.9% | 27.5% |
| FCF/Equity | 31.3% | 23.8% | 21.9% |
| Accrual Ratio | +3.0% | -3.8% | -8.9% |
Although fourth-quarter Operating Expenses were higher than we anticipated, on a trailing four quarters basis they were remarkably stable. The growth in Free Cash Flow and the stable ROIC is comforting. The increase in the Accrual Ratio suggests lower Earnings Quality, but might have been affected by the change in Cash Flow item classifications.
Value. ADP's stock price slipped from $42.39 to $41.90 during the June quarter -- it has since reversed decline. The Value gauge, based on the quarter-end closing price, moved up from 13 to 16 points.
| June 2008 | 3 mos. ago | 12 mos. ago | |
| P/E | 18.7 | 19.6 | 26.2 |
| P/E to S&P 500 average P/E | 106% | 114% | 160% |
| Price/Revenue | 2.5 | 2.6 | 3.4 |
| Enterprise Value/Cash Flow (EV/CFO) | 11.4 | 13.8 | 19.2 |
ADP's valuation ratios, which have become less expensive by the metrics we follow most closely, can be compared with other companies in the Business Software and Services industry.
The Overall gauge score of 54 of 100 points is a relatively good score for ADP. This rock-solid company is growing, highly profitable, and trading at a discount relative to historical measures.
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