ADP Rides On Strategic Acquisitions And Strong Business Model

In a year’s time, shares of Automatic Data Processing, Inc. (NASDAQ:ADP) have gained 28.6% compared with the industry’s rise of 13.6%.

Recently, the company reported impressive first-quarter fiscal 2019 results, with earnings and revenues beating the Zacks Consensus Estimate. Adjusted earnings per share (EPS) of $1.20 beat the consensus estimate by 10 cents and improved on a year-over-year basis. Total revenues of $3.32 billion outpaced the consensus mark by $40.6 million and improved 8% on a reported basis and 7% on a constant-currency (cc) basis.

ADP has an impressive surprise history. It beat estimates in each of the trailing four quarters, the average being 7%. For the second quarter, the consensus mark inched up 1.7% in the past 30 days.

Acquisitions: A Key Growth Strategy

ADP is reinforcing stake in the global human capital management (HCM) market on the back of strategic acquisitions like Celergo, WorkMarket, Global Cash Card and The Marcus Buckingham Company. These buyouts will strengthen ADP’s customer base and help it expand operations in international markets. The company continues to pursue acquisitions that strategically fit overall business mix and are easy to integrate in the long term.

Strong Business Model

The company has a strong business model, high recurring revenues, good margins, robust client retention and low capital expenditure. Moreover, it has a strong cash generating ability that allows it to pursue growth in areas that exhibit true potential. ADP has a strong pipeline for new business bookings. Also, it continues to innovate, improve operations and invest in the sales force.

Sound Balance Sheet

ADP possesses a strong balance sheet. As of Sep 30, 2018, ADP had cash and cash equivalents of $1.49 billion. It continues using excess cash to aggressively buy back shares and pay out dividends. Recently, the company hiked quarterly cash dividend by 25% to $0.79 per share. In the last reported quarter, ADP returned roughly $0.53 billion via dividends and share repurchases. We believe that this strong cash position will help the company to continue with shareholder-friendly activities and also pursue strategic acquisitions as well as investments on product development in the long run.

Zacks Rank & Key Picks

Currently, ADP carries a Zacks Rank #2 (Buy). A few better-ranked stocks in the broader Business Services sector include General Finance Corporation (NASDAQ:GFN) , Heidrick & Struggles International, Inc. (NASDAQ:HSII) and Insperity, Inc. (NYSE:NSP) , each carrying a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The long-term expected EPS (three to five years) growth rate for General Finance Corporation, Heidrick & Struggles and Insperity is 11%, 13.5% and 18%, respectively.

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