Stock Analysis

If You Like EPS Growth Then Check Out Automatic Data Processing (NASDAQ:ADP) Before It's Too Late

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NasdaqGS:ADP
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It's only natural that many investors, especially those who are new to the game, prefer to buy shares in 'sexy' stocks with a good story, even if those businesses lose money. But as Warren Buffett has mused, 'If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.' When they buy such story stocks, investors are all too often the patsy.

In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Automatic Data Processing (NASDAQ:ADP). While that doesn't make the shares worth buying at any price, you can't deny that successful capitalism requires profit, eventually. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.

See our latest analysis for Automatic Data Processing

How Quickly Is Automatic Data Processing Increasing Earnings Per Share?

As one of my mentors once told me, share price follows earnings per share (EPS). That means EPS growth is considered a real positive by most successful long-term investors. Over the last three years, Automatic Data Processing has grown EPS by 15% per year. That's a good rate of growth, if it can be sustained.

I like to take a look at earnings before interest and (EBIT) tax margins, as well as revenue growth, to get another take on the quality of the company's growth. Not all of Automatic Data Processing's revenue this year is revenue from operations, so keep in mind the revenue and margin numbers I've used might not be the best representation of the underlying business. Automatic Data Processing maintained stable EBIT margins over the last year, all while growing revenue 7.6% to US$16b. That's a real positive.

You can take a look at the company's revenue and earnings growth trend, in the chart below. For finer detail, click on the image.

earnings-and-revenue-history
NasdaqGS:ADP Earnings and Revenue History March 17th 2022

In investing, as in life, the future matters more than the past. So why not check out this free interactive visualization of Automatic Data Processing's forecast profits?

Are Automatic Data Processing Insiders Aligned With All Shareholders?

We would not expect to see insiders owning a large percentage of a US$89b company like Automatic Data Processing. But we are reassured by the fact they have invested in the company. Indeed, they have a glittering mountain of wealth invested in it, currently valued at US$112m. This suggests to me that leadership will be very mindful of shareholders' interests when making decisions!

Is Automatic Data Processing Worth Keeping An Eye On?

As I already mentioned, Automatic Data Processing is a growing business, which is what I like to see. Just as polish makes silverware pop, the high level of insider ownership enhances my enthusiasm for this growth. The combination sparks joy for me, so I'd consider keeping the company on a watchlist. It is worth noting though that we have found 1 warning sign for Automatic Data Processing that you need to take into consideration.

You can invest in any company you want. But if you prefer to focus on stocks that have demonstrated insider buying, here is a list of companies with insider buying in the last three months.

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.

What are the risks and opportunities for Automatic Data Processing?

Automatic Data Processing, Inc. provides cloud-based human capital management solutions worldwide.

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Rewards

  • Earnings are forecast to grow 8.1% per year

  • Earnings grew by 14.7% over the past year

Risks

  • Has a high level of debt

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Automatic Data Processing

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