Automatic Data ProcessingADP

Morningstar Rating

Stock Research and Analysis

by Vishnu Lekraj

Scale, high customer switching costs, and a respected brand image constitute a strong triumvirate that has given ADP a substantial competitive advantage. The minimal amount of capital necessary to run the business allows the firm to generate strong free cash flow, and management's conservative investment philosophy has insulated it from the problems competitors have faced. Read more

Bulls Say

ADP is one of a select few firms that carry a credit rating of AAA.

Having access to a large sample of business payrolls gives ADP insight that allows it to stay ahead of business trends.

ADP processed more than 54 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.

Average client retention is estimated to be longer than 10 years. Read more

Bears Say

16% of ADP's revenue base is tied to the volatile auto industry through its dealer services division.

The firm has a large amount of overlapping services and divisions, which could cause confusion and inefficiencies.

Interest income from client temporary funds could fluctuate greatly, given the current interest rate environment. Read more

Strategy

ADP has recently started to make a strong push internationally. It has opened small exploratory offices in China and India in an effort to establish a service network once these economies become more mature. Read more

Management

Stewardship at ADP has been good. We like the fact that the CEO and chairman roles are separate. We believe founder Henry Taub's presence as honorary chairman and relatively large 1% equity stake should keep the board's interests aligned with shareholders'. Read more

Profile

ADP competes in the human resources administration services industry. The firm provides services that satisfy companies human resources needs, such as payroll processing and benefits administration. Read more

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