Is Automatic Data Processing (ADP) Now Attractive After A 27% One-Year Share Price Decline?

• Wondering if Automatic Data Processing is starting to look like better value at around US$209.73, or if the recent share price leaves little margin of safety.
• The stock has seen a 3.5% decline over the last 7 days and is down 17.1% year to date, with a 27.3% decline over the past year standing against modest 3.0% and 26.8% returns across the last 3 and 5 years.
• Recent headlines around Automatic Data Processing have focused on its role as a major provider of payroll and HR services, along with ongoing interest in how recurring revenue models are holding up across market cycles. This attention helps explain why investors are reassessing both the risks and potential resilience reflected in the current share price.
• On Simply Wall St's valuation checks, Automatic Data Processing scores a 4 out of 6 for being undervalued. This invites a closer look at traditional valuation methods next and points to an even deeper way to think about what the stock might be worth later in the article.

Find out why Automatic Data Processing's -27.3% return over the last year is lagging behind its peers.

Approach 1: Automatic Data Processing Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow model estimates what a business could be worth by projecting the cash it might generate in the future and discounting those cash flows back to today at an appropriate rate.

For Automatic Data Processing, the latest twelve month free cash flow is about $4.1b. Simply Wall St uses a 2 Stage Free Cash Flow to Equity model, combining analyst forecasts with longer term extrapolations. Analyst and model projections indicate free cash flow in the $5.2b to $9.4b range over the next decade, with $6.4b projected for 2028. Each of these future cash flows is discounted back to a present value using the platform’s model assumptions.

On this basis, the estimated intrinsic value for Automatic Data Processing is $421.55 per share. Compared with the recent share price of around $209.73, this implies the stock is 50.2% undervalued under these cash flow assumptions and discount rate choices.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Automatic Data Processing is undervalued by 50.2%. Track this in your watchlist or portfolio, or discover 49 more high quality undervalued stocks.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Automatic Data Processing.

Approach 2: Automatic Data Processing Price vs Earnings

For a profitable company like Automatic Data Processing, the P/E ratio is a useful shorthand because it links what you pay per share to the earnings that support that price. The level of P/E investors are comfortable with usually reflects what they expect for future earnings growth and how much risk they see in those earnings.

Automatic Data Processing currently trades on a P/E of 19.94x. That sits close to both the Professional Services industry average P/E of 19.35x and a peer average of 19.81x, suggesting the market is pricing the stock broadly in line with comparable businesses.

Simply Wall St also calculates a proprietary “Fair Ratio” for the P/E, which is 27.99x for Automatic Data Processing. This Fair Ratio is designed to be more tailored than a simple peer or industry comparison because it incorporates factors such as the company’s earnings growth profile, profit margins, size and risk characteristics alongside its industry context.

Comparing the current P/E of 19.94x with the Fair Ratio of 27.99x indicates the shares are trading below the level implied by those fundamentals.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your Automatic Data Processing Narrative

Earlier it was mentioned that there is an even better way to understand valuation. Narratives on Simply Wall St take that next step by letting you attach a clear story about Automatic Data Processing to the actual numbers you care about. This connects your view of its future revenue, earnings and margins to a forecast, and then to a Fair Value that you can line up against today’s price on the Community page used by millions of investors. Each Narrative updates automatically as new news or earnings arrive, and different investors sometimes land far apart. For example, one ADP Narrative recently pointed to a Fair Value of about US$387.77 per share, while another came in closer to US$259.70. This shows how the same company can support very different buy or sell timing once you compare each Fair Value with the live market price.

Do you think there's more to the story for Automatic Data Processing? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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