Over the past six months, ADP’s shares (currently trading at $231.81) have posted a disappointing 10.9% loss, well below the S&P 500’s 10.9% gain. This may have investors wondering how to approach the situation.
Following the drawdown, is now the time to buy ADP? Find out in our full research report, it’s free.
Why Is ADP a Good Business?
Processing one out of every six paychecks in the United States, ADP (NASDAQ:ADP) provides cloud-based human capital management solutions that help businesses manage payroll, benefits, talent acquisition, and HR administration.
1. Long-Term Revenue Growth Shows Strong Momentum
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Thankfully, ADP’s 8.1% annualized revenue growth over the last five years was solid. Its growth surpassed the average business services company and shows its offerings resonate with customers.
2. Economies of Scale Give It Negotiating Leverage with Suppliers
With $21.6 billion in revenue over the past 12 months, ADP is a behemoth in the business services sector and benefits from economies of scale, giving it an edge in distribution. This also enables it to gain more leverage on its fixed costs than smaller competitors and the flexibility to offer lower prices.
3. Excellent Free Cash Flow Margin Boosts Reinvestment Potential
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
ADP has shown terrific cash profitability, enabling it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the business services sector, averaging 21.3% over the last five years.
Final Judgment
These are just a few reasons why we think ADP is a high-quality business. After the recent drawdown, the stock trades at 19.4× forward P/E (or $231.81 per share). Is now the right time to buy? See for yourself in our full research report, it’s free.
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