We previously posted an analysis of ADP's earnings announcement for the three months that ended on 30 September 2008, which was the first quarter of the company's fiscal 2009. Our evaluation was incomplete because the press release did not include a Cash Flow Statement and the Balance Sheet was condensed.Since ADP has now filed a 10-Q with the SEC, we are able to update the 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. 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, and Last year, ADP divested its Brokerage Services Group business, which became Broadridge Financial Solutions (NYSE: BR).
With the additional data in the 10-Q, our gauges now display the following scores.
- Cash Management: 17 of 25 (up from 8 in June)
- Growth: 20 of 25 (unchanged)
- Profitability: 13 of 25 (unchanged)
- Value: 16 of 25 (unchanged) -- see below for the effect of the recent share price drop
- Overall: 61 of 100 (up from 55)
The 10-Q didn't change our evaluation of the latest quarter's Income Statement, including the comparison with our previously communicated expectations.
Please note that the scores for the June quarter are slightly different from those originally published because of algorithm adjustments.
ADP's decision to move the net increase in Client Fund Obligations from the Investing to the Financing section of the Cash Flow Statement causes us some difficulty. 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.
| Cash Management | 30 September 2008 | 30 June 2008 | 30 September 2007 |
| Current Ratio | 1.4 | 1.7 | 1.6 |
| LTD/Equity | 0.8% | 1.0% | 0.9% |
| Debt/CFO | 0.7 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) | 39.7 days | 43.2 days | 48.5 days |
| Working Capital/Market Capitalization | 5.7% | 6.2% | 4.5% |
| Cash Conversion Cycle Time (CCCT) | 30.9 days | 31.4 days | 35.1 days |
| Gauge Score (0 to 25) | 17 | 8 | 13 |
Debt is managed well by this AAA company, but a couple of our liquidity metrics were skewed by overnight commercial paper borrowing of $1.4 billion that extended past the quarter's end.
The Inventory metrics aren't applicable to this Services company. Increases we had seen a few quarters ago in Days of Sales Outstanding have been reversed, which indicates more efficient cash management.
| Growth | 30 September 2008 | 30 June 2008 | 30 September 2007 |
| Revenue growth | 11.6% | 12.5% | 13.2% |
| Revenue/Assets | 102% | 107% | 90% |
| CFO growth | 34.6% | 36.5% | -10.8% |
| Net Income growth | 15.1% | 13.8% | 16.0% |
| Gauge Score (0 to 25) | 20 | 20 | 17 |
Given current economic conditions, it isn't surprising that ADP's Revenue growth has slowed slightly. (The company forecasts much slower Revenue growth in future quarters.) CFO growth was almost as robust as we initially estimated. Net income for the trailing four quarters benefited from a decrease in the effective income tax rate from 37.0 to 35.9 percent.
| Profitability | 30 September 2008 | 30 June 2008 | 30 September 2007 |
| Operating Expenses/Revenue | 80.2% | 80.3% | 80.4% |
| ROIC | 34.1% | 31.1% | 28.7% |
| FCF/Equity | 34.6% | 31.1% | 22.8% |
| Accrual Ratio | +8.0% | +3.0% | -6.0% |
| Gauge Score (0 to 25) | 13 | 13 | 13 |
Operating Expenses have been extremely stable when assessed on a trailing four quarters basis. The high ROIC is also comforting. However, the increasing Accrual Ratio suggests lower earnings quality. While we've tried to guard against it, it's also possible though that the Accrual Ratio increase is an artifact of changes to the accounting of client fund obligations.
| Value | 21 November 2008 | 30 September 2008 | 30 June 2008 | 30 September 2007 |
| P/E | 15.1 | 18.3 | 18.7 | 23.6 |
| P/E to S&P 500 average P/E | 90% | 109% | 102% | 138% |
| Price/Revenue | 2.0 | 2.4 | 2.5 | 3.1 |
| Enterprise Value/Cash Flow (EV/CFO) | 8.8 | 10.8 | 11.4 | 16.4 |
| Gauge Score (0 to 25) | 21 | 16 | 16 | 5 |
The contrarian Value gauge, which is the largest contributor to Overall score, moves in the opposite direction of the share price.
Per GCFR standard practice, the Value gauge score is computed with the share price at the end of the subject quarter. In this case, ADP shares closed at $42.75 on 30 September 2008. The price per share subsequently fell almost to $30, before closing at $35.25 on 21 November. As can be seen in the table above, the price drop increases the Value gauge score from 16 to 21 points.
The valuation ratios can be compared with other companies in the Business Software and Services industry.
| Overall | 21 November 2008 | 30 September 2008 | 30 June 2008 | 30 September 2007 |
| Gauge Score (0 to 100) | 72 | 61 | 55 | 42 |
The current Overall gauge score is very good and it suggests ADP shares hold significant value.
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