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.
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