Ticker: ADP

Sector: Information Technology

Industry: Data Processing &

Outsourcing

Recommendation: Sell

Pricing

Closing Price $42.12

52-wk High $45.74

52-wk Low $26.46

Market Data My recommendation for Automatic Data Processing is a Sell.

Market Cap $20.72B The fundamentals of the business are strong but the market is
Total Assets $26.86B very saturated and growth will be hard to achieve. I feel like
there are more opportunities for a stronger return than this
Trading Vol. 3.87M (avg.) business provides. Further, it is near the 52 week high, which is
more like an 8 year high. There isn’t much upside potential but
Valuation
there is not really a threat to leave our money in this stock until
EPS (tm) $2.38 we find something we like beter.

P/E (tm) 17.66

Div Yield 3.23%

Profitability & Efectiveness (tm)

ROA

ROE
4.26%

22.35%
COMPANY PROFILE
Profit Margin 13.57%
Automatic Data Processing (ADP) is one of the world’s largest
Oper Margin 19.91%
providers of business outsourcing solutions. Leveraging 60
years of experience, ADP ofers a wide range of human
resource, payroll, tax and benefits administration solutions
from a single source. ADP is also a leading provider of
integrated computing solutions to automotive, heavy truck,
By: Taylor Fox
motorcycle, marine, recreational vehicle and heavy machinery
Stf427@mail.missouri.edu dealers throughout the world.The Company’s segment includes
Employer Services, Professional Employer Organization (PEO)
Services and Dealer Services. Employer Services ofers a range

1
of HR information, payroll processing, tax and benefits administration solutions and services,
including traditional and Web-based outsourcing solutions, that assist approximately 570,000
clients in the United States, Canada, Europe, South America (primarily Brazil), Australia and Asia
to staf, manage, pay and retain their employees. In November 2009, the Company announced
the purchase of HRinterax, Inc as well. The company was founded in 1949. It is headquartered
in Roseland, New Jersey and employs 45,000 people.

ADP processes payments of one in six U.S workers. It serves more than 540,000 clients in more
than 40 countries and no single client contributes more than 2% of ADP’s total revenues. In
fiscal year 2009, ADP processed more than 51 million end-of-year tax statements for its clients'
employees and helped facilitate the transfer of more than $1 trillion in client funds to taxing
entities. ADP is one of only four nonfinancial companies to have an AAA credit rating from
Standard & Poor’s, along with Johnson & Johnson, Exxon and Microsoft. They also have an AAA
rating from Moody’s.

ADP has a wide moat in the industry and strong profitability. This is due to reasons like high
customer switching costs, economies of scale and their brand image. Because of the dificulty in
switching outsourced human resources processes to another provider, ADP is able to lock
clients into its services through long-term contracts. Average client retention is 10 years, and
this helps ADP to raise prices with litle resistance. ADP's economies of scale allows the
company to be price-competitive without feeling margin pressure as it can leverage its large
540,000-member client base to spread out costs associated with its servicing infrastructure.
The company's strong brand plays a role, as clients are hesitant to entrust their critical HR
functions to an unproven competitor. ADP's established competitive position and the
industry's minimal capital-reinvestment requirements have enabled the firm to turn 17% of
its revenue into free cash flow on average over the past five years. The minimal amount of
capital necessary to run the business allows the company to generate strong free cash flows.

Most of ADP’s revenues come from the U.S. The company is trying to diversify geographically,
and in 2009, acquired a majority interest in a leading Chinese provider of HR outsourcing
services. They also started ofering wage and tax collection & remission services in Canada, the
United Kingdom and the Netherlands.

2
Business Segments

EMPLOYER SERVICES

Employer Services offers a comprehensive range of HR information, payroll processing, tax and
benefits administration solutions and services, including traditional and Web-based
outsourcing solutions, that assist approximately 570,000 employers in the United States,
Canada, Europe, South America, Australia and Asia to staff, manage, pay and retain their
employees. Employer Services markets these solutions and services through its direct
marketing sales force and, on a limited basis, through indirect sales channels, such as
marketing relationships with banks and accountants, among others. In fiscal 2009, 80% of
Employer Services’ revenues were from the United States, 13% were from Europe, 5% were
from Canada and 2% were from South America (primarily Brazil), Australia and Asia.

Employer Services’ approach to the market is to match clients’ needs to the solutions and
services that will best meet their expectations. To facilitate this approach, in the United States,
Employer Services is comprised of the following market-facing groups: Small Business Services,
Major Account Services and National Account Services. In addition, Employer Services’ Added
Value Services division provides services to clients across all three of these groups.

ADP provides payroll services that include the preparation of client employee paychecks,
electronic direct deposits and stored value payroll cards, along with supporting journals,
summaries and management reports. ADP also supplies the quarterly and annual social
security, medicare and federal, state and local income tax withholding reports required to be
filed by employers. ADP also enables its clients to interface their major enterprise resource
planning (ERP) applications with ADP’s outsourced payroll services.

ADP, through its Tax and Financial Services division, processes and collects federal, state, and
local payroll taxes and remits them to the taxing authorities. ADP provides an interface
between clients and over 7600 tax agencies in the U.S, from the IRS to local governments. In
fiscal 2009, ADP processed over 51 million tax statements and moved over $1 trillion in client
funds. ADP's insurance services ofers comprehensive workers' compensation payment
programs and job tax credit services that assist employers in the identification of, and filing for
tax credits.

Other services provided through this segment are Retirement Services, Pre-Employment
Services and Talent Management Services.

3
DEALER SERVICES

Dealer Services provides integrated dealer management systems and other business
management solutions to automotive, heavy truck, motorcycle, marine, RV and heavy
machinery retailers in North America, Europe, Africa and the Asia Pacific region. Approximately
27,000 retailers in over 90 countries use ADP’s DMS solutions, other software solutions,
networking solutions, data integration, consulting and/or digital marketing solutions and
services.

Clients use ADP’s DMS solutions to manage core business activities such as accounting,
inventory management, factory communications, appointment scheduling, vehicle financing
and insurance, sales and service. In addition to its DMS solutions, Dealer Services offers its
clients integrated applications to address each functional area of the dealership, including
Customer Relationship Management applications, front-end sales and marketing solutions, and
an IP Telephony system fully integrated into the DMS to help dealerships drive sales processes
and business development initiatives. Dealer Services provides its dealership clients computer
hardware, hardware maintenance services, software support, system design and network
consulting services. Dealer Services also designs, establishes and maintains communications
networks for its dealership clients that allow interactive communications among multiple site
locations as well as links between franchised dealers and their franchisors.

Although, recession was severe during 2008-2009,

revenues of ADP for 2009 is $8,867.1 million, as
compared to $8,776.5 million in FY2008. Revenues
from the Employer Services segment increased by
4%, or $225.3 million, to $6,587.7 million, and
revenues from the PEO Services segment
increased by 12%, or $125.3 million, to $1,185.8
million. This increase was due to a 10% increase in
the average number of worksite employees arising
from new client sales. Net income also increased
from being $1,235 million in 2008 to $1,332,600
million in 2009.
Dealer Services’ revenues, which were negatively
impacted by the difficulties facing the automotive
industry, decreased 3% in fiscal 2009 due to
dealership consolidations and closings, lower
transactional revenue and dealerships reducing
services in order to cut their discretionary
expenses.

4
 The majority of ADP’s revenues come from the
U.S. During FY2009, 80% of Employer Services’
revenues were from the United States, 13% were
from Europe, 5% were from Canada and 2% were
from South America (primarily Brazil), Australia
and Asia.

ADP has recently started to make a strong push

internationally. The company opened
exploratory offices in China and India in an effort
to establish a service network as these
economies become more mature. In addition,
ADP also acquired a majority stake in a leading
Chinese provider of HR outsourcing services. ADP
is also establishing a strong global network
outside emerging markets to beter serve large
multinational firms seeking to obtain consistent
global HR services. Recently in November 2009,
the Company also announced the purchase of
HRinterax, Inc as well to boost its operations and
businessgrowth.

ADP's financial position is very strong, with 90%

FINANCIAL TRENDS
recurring revenues, excellent margins from the
ability to generate consistent, strong cash
flows, strong client retention and low
capital expenditure requirements. The
company has raised the dividend payout for
35 consecutive years while maintaining an AAA
credit rating.

ADP has also been engaged in an aggressive

share buyback program, and the company has
bought back approximately 20% of the
common stock that was outstanding as on
June 30,
2006. ADP repurchased 40 million of its shares
in FY 07, 33 million in FY 08, and 13.8 million in
FY 09, and expects to continue
repurchases through 2010. This signals
management's confidence in the stock.

ADP’s balance sheet is very strong, with $3.8 B

of cash and short-term securities at the end of
FY 2009, and long-term debt of around $42.7
million. Its ability to generate strong cash flow
should help keep the company unleveraged.
ROE was 25.5% in FY2009 as compared to
22.7% in ’08 and 18.3% in ’07. Net
earnings from operations increased 14% in
FY2009 to $1.3B as compared to $1.1B in
2008.

5
Below is the 5 year dividend payout with the yield being around 3.2%.

SWOT ANALYSIS
Looking at the above table we realize that ADP has far beter Gross and Operating margins as
compared to both its sector and industry. Also, net profit margin is exceedingly beter as
compared to industry and sector as well.

6
We can see all the three critical ratios: ROA, ROI and ROE has been really good as well for ADP.
This shows how good the strategy is of ADP to eficiently and efectively utilize resources.

SWOT Analysis

STRENGTHS

Compettive market
position
The company strengthened its market position through the employer services and the dealer
services. ADP ofered PEO services to over 560,000 employers worldwide and paid nearly 33
million workers in over 30 countries. The company provided over 50 million workers with one
or more of its services and moved over one trillion dollars in client payroll taxes, direct
deposits, and related funds in the US and Canada. ADP also has a leadership position in the
services ofered to large businesses. The closest competitors of ADP, Paychex and
Administaff offer services primarily to small and midsize business, so they are not in direct
competition with ADP.

Client retenton
ADP has strong client retention capabilities. No single client accounted for revenues in excess of
2% of annual consolidated revenues. The company's business is typically characterized by long-
term customer relationships that result in recurring revenue. ADP is continuously in the process
of performing implementation services for clients. ADP's largest clients, both in the US and in
international markets, generally are with the company on an average for about 15 years. This is
important because revenue from existing clients is more profitable than revenue from new
clients, where there is more selling and implementation expenses. The company's higher client
retention and superior client service serves as a competitive advantage.

7
WEAKNESSES

Geographic
concentraton
ADP is significantly dependent on the US. The company earned about 80% of its total revenues
from the US market in fiscal year 2009. The US operations have historically accounted for a
significantly large portion of the company's revenues. However, the company has started taking
initiatives to increase their international operations and revenues, with their acquisition of a
Chinese HR services company in 2009, and increasing the services ofered in countries like
Canada and the Netherlands. The company also opened offices in China and India last year, and
this is a good move as business is rapidly expanding in these countries.

OPPORTUNITIES
Emerging Digital Marketng
Arena
The dealership advertising and marketing programs are evolving steadily into digital media. ADP
estimates that dealers spend roughly $8 billion annually on advertising initiatives, with
approximately $6 billion channeled through traditional sources (newspapers, radio, etc) and
approximately $2 billion allocated to digital marketing. The market is poised for a dramatic shift
towards digital means of promotion, and the company intends to be at the focus of this
transformation. It is involved in a number of digital programs geared towards driving Internet
search engine trafic to its customer's websites. In addition, the company's management stated
that approximately 70% of people initiate vehicle searches via the Internet, while only 10% of
auto dealers use this method of marketing. ADP foresees enormous potential in creating digital
oferings like rich content dealer websites. The company's 2006 acquisition of BZ Results, a
major provider of innovative e-marketing solutions, has become a strong catalyst for
accelerating the growth of ADP's Digital Marketing business. BZ Results helps dealers engage
more online customers using tools such as search engine optimization, e-mail marketing, virtual
test drives, Internet lead management, and automated follow-up. These eforts help ADP gain
an edge over its competition and position themselves beter for future opportunities.

Acquisitions
ADP has made several acquisitions over the past three years to help expand its client base and
reach into adjacent markets. The company acquired four businesses in 2009, four in 2008 and
eleven other businesses in 2007 for a total cost of $550 million. ADP has used its large cash
balances to strengthen their position in the market during the recession, and also set them up
for further growth when the economy picks up. Some of their acquisitions are Employease, a
provider of web-based solutions for HR and benefits professionals; VirtualEdge Corporation, an
innovator in the field of recruiting and talent lifecycle management solutions for HR
organizations; the fully-outsourced payroll business of Intuit; the tax incentives business of
Mintax; and Taxware, a major provider of tax content and compliance solutions for sales, use,
and value added tax. These acquisitions enable the company to increase the breadth of its
oferings and also enable the company to leverage the customer base of the acquired
companies to generate incremental revenues.

8
HR BPO services
ADP's new business opportunities include Human Resource Business Process Outsourcing (HR
BPO), which focus on the outsourcing of integrated multiple processes, such as payroll, HR, and
benefits administration. Human resources business process outsourcing is the fastest-growing
segment of HR services. The global HR outsourcing industry is estimated to reach $50 billion by
2010, which would represent a CAGR of 12% from the 2007-2010 period. ADP has a strong
operating base in the US and prominent position in the services it ofers. The company, as one
of the leading players, is bound to benefit from the growth of the global HR outsourcing
industry.

THREATS

Matured core payroll

business
Employer Services categorizes its services between traditional payroll and payroll tax, and
"beyond payroll." The traditional payroll and payroll tax business represents the company's
core payroll processing and payroll tax filing business. The "beyond payroll" business represents
the services that extend beyond the traditional payroll and payroll tax filing services, such as
time and labor management, and benefit and retirement administration. ADP's core payroll
business is becoming more mature. New product releases often give sales a boost; lack of
product innovation could prove to be detrimental to sales growth. For example, the company's
beyond payroll solutions have displayed great payroll revenue growth, well above its core
ofering. ADP has to continue to develop more new products to sustain high levels of sales
growth in its core payroll services.

COMPETITOR COMPARISON

9
The industries in which ADP operates are highly competitive. ADP is the largest company in the
industry in terms of revenue and market capitalization. ADP identifies its nine largest
competitors as Administaff Inc., Computer Sciences Corporation Global Payments Inc., Hewitt
Associates Inc., Intuit Inc., Paychex Inc., The Ultimate Software Group Inc., Total System
Services Inc., and The Western Union Company. While these are the direct competitors of
ADP, none of these companies is as diversified as ADP. The majority of these companies are
only in direct competition with ADP in a single or a few specific areas. Paychex (PAYX) and
Administaff (ASF) are the two companies that are most similar to ADP. These two companies
delivery many of the same services ADP does, however, their target market is small and
midsized companies. ADP has just recently lunched product lines targeted at the small and
midsized companies. The majority of ADP’s clients are large companies with over 15,000
employees.

STOCK PERFORMANCE
5 Year Performance ADP VS. S&P500

10
5- year stock price movement ranges entrely from about 35-50 per share.

Recent News
th
 ADP Workforce Now. Eclipses 7000 client

 Aquistions of Workscape and Cobalt in August.

 Automatc Data Processing, Inc. Issues FY 2011 Guidance; EPS Guidance Below
Analysts' Estmates
o Automatic Data Processing, Inc. announced that for fiscal 2011, it expects
revenue to increase 1% to 3%, diluted earnings per share (EPS) to increase 1% to
3%, compared with $2.37 earnings per share from continuing operations in fiscal
2010 which excludes favorable tax items. The Company reported revenue of $8.9
billion in fiscal 2010. According to Reuters Estimates, analysts on an average
were expecting the Company to report revenue of $9.219 billion and EPS of
$2.52 for fiscal 2011.

11
PRESENT PERFORMANCE & FUTURE OUTLOOK

ADP has done well in the last couple of years, especially taking into account how severe the
recession and economy was two years back. The graphs below show – how strong revenues
have been for ADP over the last 5 years.

We can see that in spite of the recession, revenues didn`t take a hit for ADP.

Also, as seen from the above figure, the cash flows from operating activities have remained
very robust during the last five years as well.ADP is well poised to take advantage of the future
growth opportunities in the global HR outsourcing industry. The company has spent the last
few years consolidating their leadership position in the industry and acquiring other businesses
with the strategy of diversifying into markets they do not currently serve. Though ADP has
focused on serving large companies, they are now geting into other segments of the market to
directly compete with companies like Paychex and Administaf. ADP acquired HRinterax, an HR
content and support services company focused on the small business market, in Nov. 2009.
HRinterax ofers HR consulting services, and a best-in-class HR solution through their award-
winning web portal, HR411. Strategic acquisitions like this made over the past two years will
help ADP take away market share from their competitors and consolidate their leadership
position in the industry.

12
VALUATION

Second Stage Growth Rate

2% 3% 4% 5%
9% 57.91 63.77 71.98 84.3
10% 50.28 54.33 59.73 67.29
11% 44.39 47.3 51.03 56.01
12% 39.73 41.87 44.55 48

The consensus growth ratres through 2015 were relatively similar and there are a few projects
they should benefit from so I feel confident in those numbers. Further, all of the numbers I had
to manually input have been consistent over the past few years so they seem accurate as well.
The stock is currently trading around $42.00.

13
RESOURCES USED

References:

 www.morningstar.com
 www.bloomberg.com
 www.reuters.com
 www.finance.yahoo.com
 www.finance.google.com
 www.seekingalpha.com
 www.dividendgrowthinvestor.com
 Standard & Poor’s Stock Reports
 Dow Jones Stock Reports
 Earlier reports from previous analysts and now updated

14