ADP Rides On Strategic Business Moves, Strong Balance Sheet

Automatic Data Processing, Inc. (NASDAQ:ADP) stock has rallied a massive 28.9% in the past year, outperforming the S&P 500’s gain of 13.7%. The company is well poised on the back of strategic acquisitions and strong cash generation ability. ADP’s focus on streamlining its business is a positive as this should strengthen its core operations in the long run.

In third-quarter fiscal 2018, ADP posted impressive results with earnings and revenues surpassing the Zacks Consensus Estimate and increasing on a year-over-year basis.

Adjusted earnings per share surpassed the Zacks Consensus Estimate by 8 cents and increased 16% year over year. Revenues came in at $3.69 billion, outpacing the consensus mark by $26 million. The top line improved 8% on a reported basis and 6% on a constant-currency basis.

In the reported quarter, the company witnessed revenue growth across all its segments and significant improvements in key performance indicators like new business bookings and Employer Services retention.

Also, the company’s earnings surprise history has been impressive. It surpassed the consensus estimate in three of the previous four quarters, with an average positive surprise of 5.2%. For fourth-quarter fiscal 2018, the consensus estimate moved up 12.7% over the past 60 days.

Strategic Buyouts

Acquisitions have played an important role in ADP’s growth. Through acquisitions like WorkMarket (in January 2018), Global Cash Card (in October 2017) and The Marcus Buckingham Company (in January 2017), the company has not only gained new customers but has also been able to expand its operations in international markets. We believe that the company will continue to pursue acquisitions that strategically fit its overall business mix and are easy to integrate over the long term.

Business Improvement Initiatives

ADP has been continuously taking up initiatives to streamline its business. We believe this should help the company strengthen its core operations in the long run. In tune with this strategy, in the past few years, the company has divested a number of divisions including AdvancedMD, Procure-to-Pay business, Dealer Services, Occupational Health and Safety services and Taxware Enterprise Service.

Strong Cash Position

The company exited third-quarter fiscal 2018 with cash and cash equivalents of $2.3 billion. ADP’s strong cash position allows it to aggressively buy back shares and pay out dividends.

As of Mar 31, 2018, ADP paid $278.4 million of dividend to its shareholders and repurchased $187.9 million of stock. Further, on Apr 11, 2018, ADP announced a dividend hike of 10%, raising its regular quarterly dividend to 69 cents per share.

These shareholder-friendly initiatives not only instill investors’ confidence but also positively impact earnings per share.

Zacks Rank & Other Stocks to Consider

Currently, ADP has a Zacks Rank #2 (Buy). Some other top-ranked stocks in the broader Business Services sector include TriNet Group, Inc. (NYSE:TNET) , Broadridge Financial Solutions Inc. (NYSE:BR) and The Brink’s Company (NYSE:BCO) . While Trinet sports a Zacks Rank #1, Broadridge and Brink’s Company carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

In the trailing four quarters, Trinet, Broadridge and Brink’s Company delivered a positive earnings surprise of 60.4%, 23.6% and 10.9%, respectively.

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