Partnership With Fiserv And AI Investments Will Expand Payroll And HR Services

Key Takeaways

• Strategic partnerships and acquisitions, like with Fiserv and WorkForce Software, aim to expand offerings and increase revenue across various markets.
  
• Investment in technology and high client satisfaction drive cost efficiencies, sales productivity, and business retention, supporting sustained revenue growth.
  
• Projected declines in client retention, revenue growth, and margins due to rising costs and integration expenses could challenge future revenue and earnings growth.

Catalysts

Engages in the provision of cloud-based human capital management (HCM) solutions worldwide.

• The strategic partnership with Fiserv is expected to drive growth by integrating ADP's RUN payroll and HR solution with Fiserv’s Clover platform. This collaboration aims to expand ADP's small business offerings, potentially increasing revenue through cross-selling and new client acquisitions.
  
• The acquisition of WorkForce Software is anticipated to enhance ADP's workforce management capabilities, allowing the company to offer integrated time and attendance solutions. This move could lead to increased revenue from serving a broader range of industry verticals and geographic markets.
  
• The introduction of ADP Lyric, a global HCM platform, is generating strong market interest and increasing client adoption. By improving user experience and expanding international reach, this platform is likely to boost new business bookings and contribute to revenue growth.
  
• Continued investment in AI and machine learning to enhance service operations and sales efficiency could improve net margins by driving cost efficiencies and increasing sales productivity, ultimately leading to higher earnings.
  
• Record-high client satisfaction levels and strong business retention are expected to sustain revenue growth and maintain net margins by ensuring a stable customer base and fostering upsell opportunities.

Automatic Data Processing Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Automatic Data Processing's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.7% today to 20.8% in 3 years time.
• Analysts expect earnings to reach $4.7 billion (and earnings per share of $11.81) by about January 2028, up from $3.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.5x on those 2028 earnings, down from 31.6x today. This future PE is greater than the current PE for the US Professional Services industry at 25.1x.
• Analysts expect the number of shares outstanding to decline by 0.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.41%, as per the Simply Wall St company report.

Automatic Data Processing Future Earnings Per Share Growth

Risks

• The deceleration in Employer Services (ES) pays per control growth, which came in slightly below expectations at 1%, could indicate slower client hiring or reduced usage, potentially impacting future revenue and growth projections.
  
• The PEO margin decreased by 140 basis points due to higher zero-margin benefits pass-through revenue growth and increased costs in workers' compensation and state unemployment insurance, which may pressure net margins if these trends persist.
  
• The forecast of a modest decline in Employer Services retention by 10 to 30 basis points for fiscal 2025 could suggest challenges in client retention, which might negatively impact revenue if not mitigated.
  
• Despite strong new business growth, expected deceleration in both ES and total revenue growth in Q3 before a potential rebound in Q4 could signal temporary challenges related to revenue timing and FX headwinds.
  
• Integration expenses associated with the WorkForce Software acquisition and associated amortization could lead to lower adjusted EBIT margin expansion and EPS growth in the near term, thus impacting earnings.

Valuation

• The analysts have a consensus price target of $299.01 for Automatic Data Processing based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $22.8 billion, earnings will come to $4.7 billion, and it would be trading on a PE ratio of 30.5x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of $298.31, the analyst's price target of $299.01 is 0.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.