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Cash Flow Analysis: There Is An Opportunity For Automatic Data Processing To Improve Its Valuation (NASDAQ:ADP)

Cash Flow Analysis: There Is An Opportunity For Automatic Data Processing To Improve Its Valuation (NASDAQ:ADP)

Automatic Data Processing (ADP) was going strong into 2020 and they laid out plans in their February Investor Day of goals to have 5-6% top-line growth given their new product rollouts, large addressable market, and favorable operating environment. Both the business performance and stock price were hit hard by the COVID-19 pandemic. Although FY20 revenue and margins were slightly higher compared to the previous year, the fourth quarter ended 6/30 was rough as revenue declined and margins compressed. To preserve cash, management put share repurchases on hold. These were reasons why the stock price crumbled from ~$180 per share to ~$140 per share before rebounding to where it is currently trading ~$160 per share. This article will explore ADP’s future cash flows and valuation to see if there is coverage for business operations, expansion, share buybacks, and dividends, and how ADP can expand its premium.

Revenue

ADP had some consistent revenue growth over the last several years. The real outlier was FY20 that was plagued by the pandemic.

Source: Seeking Alpha

The figures outlined in the FY20 Press Release show how the pandemic impacted the fourth quarter (the wavy highlighting was included for emphasis). Bookings were down, retention rate was down, and margins were down. A bright spot is that the business was doing well enough into the second half that they still generated revenue growth.

In February, ADP had its Innovation Day and it laid out its plans for long term of 5-6% per annum. This was to be achieved by continuing to penetrate the addressable market and rolling out products that they spent a bunch of capital on. 2020 was to be the year that these new products were supposed to be scaled and drive incremental revenue. The increase in sales from these products will not be as

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UMB Financial: A Compressed Valuation Should Grind Higher Over The Medium Term (NASDAQ:UMBF)

UMB Financial: A Compressed Valuation Should Grind Higher Over The Medium Term (NASDAQ:UMBF)

Investment Thesis

Headquartered in Kansas City, Missouri, UMB Financial Corporation (UMBF) is the $29.7 billion asset holding company for UMB Bank. Formally known as United Missouri Bank, UMBF is a commercial-oriented Midwestern bank. While its runs a fairly branch-lite model, UMBF has 95 branches located throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska, Arizona and Texas.

UMB Financial, along with its sibling bank, Commerce Bancshares (OTC:CBSH), both have a storied century-long history of being run by the Kemper family. With that being said, I have a lot of faith in Mariner Kemper, the current CEO, and his ability to lead the franchise. He has led the bank for more than 15 years and helped grow assets from $8.2 billion to where they are today.

Today, my bullish stance is predicated on a couple of factors. I think the valuation is too low for such a well-run franchise; however, valuation alone does not invoke a great investment thesis. In order for shares to re-accelerate higher, I think there needs to be a definitive line of sight into the net interest margin (NIM) no longer compressing. This alone should help shares work higher in the shorter term. If credit continues to remains stronger than average over the next couple quarters, I think the shares will experience very healthy outperforming trend. In short, the positive NIM outlook should cause a near-term pop in the shares, while solid credit should provide the positive catalyst for long-term outperformance.

ChartData by YCharts

Revenue Outlook

In the second quarter the net interest income came in at $178.2 million, which was actually up a little more than $4 million from first quarter levels. While the NIM did compress in the quarter, overall loan growth (greatly supported by PPP loans) helped drive higher average earning assets to support a higher

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