Is It Time To Revisit Automatic Data Processing (ADP) After Recent Share Price Weakness

• Wondering if Automatic Data Processing at around US$202.87 is starting to look interesting on value, or if the share price still has more to adjust.
• The stock is up 4.0% over the last week, though it shows a 2.8% decline over 30 days and a 19.8% decline year to date, with a 29.0% decline over the past year and modest gains over 3 and 5 years.
• Recent news coverage has focused on broader sentiment toward large, established business service providers and how investors are reassessing expectations in that part of the market. Commentary has also highlighted how changing interest rate expectations and competition across payroll and HR platforms are affecting attention on companies like Automatic Data Processing.
• Against that backdrop, Automatic Data Processing holds a valuation score of 5/6. This sets up a closer look at traditional valuation methods and hints at a more complete way to think about value that will come later in this article.

Find out why Automatic Data Processing's -29.0% return over the last year is lagging behind its peers.

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

A Discounted Cash Flow, or DCF, model estimates what a business might be worth today by projecting future cash flows and discounting them back to a present value. It focuses on the cash a company could return to shareholders over time rather than near term earnings moves.

For Automatic Data Processing, the model used is a 2 Stage Free Cash Flow to Equity approach, built on cash flow projections. The latest twelve month Free Cash Flow is about $4.1b. Based on analyst inputs for the next few years, and then extended projections provided by Simply Wall St out to 2035, Free Cash Flow is expected to reach about $9.4b in 2035 according to that framework.

When all those projected cash flows are discounted back to today, the estimated intrinsic value comes out at about $410.11 per share. Against a recent share price around $202.87, this DCF view implies the stock trades at roughly a 50.5% discount, which indicates a valuation that screens as cheap on this model.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Automatic Data Processing is undervalued by 50.5%. Track this in your watchlist or portfolio, or discover 58 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

P/E is a common way to value profitable companies because it links what you pay per share to the earnings that support that share price. When investors expect higher growth or view the business as lower risk, they often accept a higher P/E. If growth expectations or perceived risk are lower, a more modest P/E can make more sense.

Automatic Data Processing currently trades on a P/E of 19.29x. That sits close to the Professional Services industry average P/E of 19.52x and slightly above the peer group average of 18.29x, so on simple comparisons the stock looks broadly in line with similar companies.

Simply Wall St also uses a proprietary “Fair Ratio” of 26.21x, which is the P/E it would expect for Automatic Data Processing given factors such as earnings growth, industry, profit margins, market size and risk profile. This Fair Ratio aims to be more tailored than a basic peer or industry comparison because it adjusts for the company’s specific characteristics rather than treating all firms as alike. Comparing the Fair Ratio of 26.21x with the current P/E of 19.29x indicates the shares are trading below that tailored benchmark.

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. This is where Narratives come in, giving you a clear story behind the numbers by linking your view on Automatic Data Processing, your assumptions for future revenue, earnings and margins, and the fair value that follows from those forecasts.

A Narrative on Simply Wall St is your concise investment story, where you set the expectations and the platform turns them into a full forecast and fair value. You can then compare that fair value to the current share price and decide whether the stock looks rich or cheap against your own criteria rather than a generic model.

These Narratives sit inside the Simply Wall St Community page and are updated automatically as new data such as news, earnings or analyst estimates are added. Your story and valuation therefore move with the information instead of going stale.

For Automatic Data Processing, for example, one investor might build a bullish Narrative using the higher fair value and assumptions such as US$25.6b of revenue, US$5.5b of earnings and a 29.5x P/E around 2029. Another might anchor to the lower fair value with US$24.5b of revenue, US$5.0b of earnings and a 20.9x P/E. The platform converts each of those views into its own fair value path that can be tracked against the live market price over time.

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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