ADP Security Evaluation Essay Example For Students

ADP Security Evaluation Essay ADP Automatic Data Processing, Inc. (NYSE:AUD)ADP is one of the largest independent computing services firms in the world with more than $4.5 billion in annual revenues and more than 425,000 clients. Founded in 1949, ADP provides computerized transaction processing, data communications, software, and information services to companies in virtually every industry. ADP Employer Services is the worlds largest provider of payroll services and human resource administration systems. It offers a comprehensive range of benefits, payroll and business tax deposit and reporting, time and attendance, 401(k) recordkeeping, and unemployment compensation and management services. In addition, ADP provides securities transaction processing and investor communications services to the brokerage and financial communities, industry-specific computing and consulting services to auto and truck dealers, and computerized, automated auto-repair estimating and auto parts availability services to the auto-repair industry. I picked ADP to analyze because their Dealers Services Group is a major player in the same industry as the company I work for, ABMC, Inc., Automotive Business Management Consultants, Inc. Computerized automated management for auto and truck dealers is big business, and there is stiff competition for dealers business. Because of ADPs size and diverse corporate structure, it is difficult to make comparisons with ABMC, Inc. We are still very small with only 38 employees and about 1,000 dealers. In addition, ABMC, Inc. is still privately owned with no outstanding security issues. Automotive related software is our only business as well. ADP is quite diversified and their Dealer Service Group provides only 15% of the companys total revenue. Over 18,000 auto and truck dealers in the United States, Canada, Europe, Asia, and Latin America use ADPs on-site systems and communications networks to manage virtually every are of operations. From parts sales, to repair service, to new vehicle to sales to bookkeeping. ADP systems and services target every aspect of the auto dealership. ADP has a remarkable record of earning growth. In July of 1996 it was published that ADP is the only public company in the nation to achieve consistent, record growth in earning and revenue for 139 quarters, nearly 35 years. Well, they have now reported 150 consecutive quarters of record sales and earnings. Thats 37 straight years of double-digit earnings per share growth. In just the past four years the earnings per share has grown at an average rate of 14%. Not only do analysists expect ADP shares to continue to perform, but the prediction is for the shares to actually outperform the market in the coming months. Total revenue and net earnings have also steadily climbed for ADP. In the September 14, 1998 listing of VARBusiness Top 100 Stocks, ADP ranked 44th based on an average annual return of 22.0%.Two stiff competitors in the Dealer Services business, Reynolds Reynolds and EDS ranked 46th and 57th, respectively. ADP stock carries Value Lines highest safety ranking. Their high recurring revenue stream, predictable interest income, and low exposure to foreign markets makes it an excellent portfolio holding. Much can be said about ADPs management as well. An October 1997 article in Sales Marketing Management noted ADPs sales-oriented culture, and gave their management praise for continually making strategic changes to improve efficiency. Weekly sales meetings at regional offices are designed to recognize and reward high achievers, as well as motivate sales personnel lagging behind. Wild applause and standing ovations are commonplace at these events. Upbeat music plays and high-fives abound, as employees share in camaraderie not often found in the workplace. According to stock analyst James A. Meyer, This company is so well managed that its the envy of everyone on Wall Street. Meyer went on to say, ADP manages resources prudently. All things being equal, far fewer people get far more done at AD P than at the average American corporation. Thats because its decentralized. ADPs theory rests in not making something complicated that isnt. Employees in the field report to management; management doesnt try to micromanage every little aspect of the company. Banning On Cloning Is Unjust EssayFrom Value Line1999 Dividend Declared$ 0.30with a financial calculator,PV-0.30I/YR14.47%estimated dividend growth rateBased on the calculation steps described above, I have determined the present value price of ADPs stock to be $26.69. This is lower than the NYSE closing price $39.375 on Friday, March 26, 1999 as reported by the Wall Street Journal. The estimated price of the stock at the end of the supernormal growth period is $39.90, calculated as the Earnings per Share of $1.90 times the Price Earning Ratio of 21.0. Using a financial calculator, discount each expected FV dividend to the present using the required rate of return. The sum of these present values, and the PV of the estimated value of the stock at the end of the supernormal dividend growth period is the current stock price. I/YR11.75511.75511.75511.755PV.268.275.28225.869$26.69This difference between my price of $26.69 and the NYSE closing price of $39.375 on March 26, 1999 is most likely related to investor expectations about the future of the stock compared to the projected figures reported in ValueLine. The stock is selling for a premium, in essence, which indicates that investors feel the expected return and benefits of holding ADP stock are greater than available in other securities available. With the turn of the century rapidly approaching, investors may be looking for stocks with proven track records. (Over 37 years of double-digit earnings per share growth isnt too shabby!) In February of this year ADP sold Peachtree Software, an accounting software package for small business, to Sage Software, Inc. This sale of close to $145 million dollars occurred after the ValueLine publication I used in this security analysis. This sale could very well have caused the current trading price of ADP stock to rise well above the price I calculated. Slight changes in either the stocks beta or the risk free rate make only small changes in the stocks price. If the 30-year Treasury bond rate were 6.5%, the stocks cost of capital changes to 12.675% and the price of the stock falls to $25.84. If we raise ADPs beta to just over the market level to 1.05 the price of the stock becomes $26.09. With proven management and earnings records, ADP, Inc. is a wise investment. Despite changes in the market and the U.S. and world economy, ADP has maintained positive growth over more than a quarter of a century. Their market share in the data processing and integrated payroll services industry is unmatched. They have mastered the business of human resources and personnel administration services and it is paying off. Approximately 57% of company revenues come from this division. ADPs diversification into brokerage services and dealer and claim services helps to stabilize any market and corporate fluctuations. Business Wire. ADP Earns Top Honors Fro m Fortune Magazine. February 16, 1999. Dowling, Debra. Roseland, N.J., Company Envy of Wall Street. Knight-Ridder/TribuneBusiness News, July 12, 1996 p7120344Rasmusson, Erika. ADP (Automatic Data Processing Inc.s Sales Strategies. Sales Marketing Management, Oct 1997 v149 n10 p54(1). VARBusiness. The Top 100 Stocks Best of Publicly Traded Firms Among the VAR 500, Distribution 50 and retailers. September 14, 1998. Wernle, Bradford. Manheim, ADP Team Up On Used Cars. Automotive News, Sept. 22, 1997 Bibliography:Business Wire. ADP Earns Top Honors From Fortune Magazine. February 16, 1999. Dowling, Debra. Roseland, N.J., Company Envy of Wall Street. Knight-Ridder/TribuneBusiness News, July 12, 1996 p7120344Rasmusson, Erika. ADP (Automatic Data Processing Inc.s Sales Strategies. Sales Marketing Management, Oct 1997 v149 n10 p54(1). ValueLine. 1999. VARBusiness. The Top 100 Stocks Best of Publicly Traded Firms Among the VAR 500, Distribution 50 and retailers. September 14, 1998. Wernle, Bradford. Manheim, ADP Team Up On Used Cars. Automotive News, Sept. 22, 1997 n5732 p50(1).