Stock Analysis

Is Now The Time To Put Automatic Data Processing (NASDAQ:ADP) On Your Watchlist?

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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 the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses.

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. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.

See our latest analysis for Automatic Data Processing

How Fast Is Automatic Data Processing Growing?

As one of my mentors once told me, share price follows earnings per share (EPS). Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. Automatic Data Processing managed to grow EPS by 12% per year, over three years. 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. I note that Automatic Data Processing's revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. Automatic Data Processing maintained stable EBIT margins over the last year, all while growing revenue 5.5% to US$15b. That's progress.

In the chart below, you can see how the company has grown earnings, and revenue, over time. For finer detail, click on the image.

earnings-and-revenue-history
NasdaqGS:ADP Earnings and Revenue History November 17th 2021

Of course the knack is to find stocks that have their best days in the future, not in the past. You could base your opinion on past performance, of course, but you may also want to check this interactive graph of professional analyst EPS forecasts for Automatic Data Processing.

Are Automatic Data Processing Insiders Aligned With All Shareholders?

We would not expect to see insiders owning a large percentage of a US$99b company like Automatic Data Processing. But we are reassured by the fact they have invested in the company. Notably, they have an enormous stake in the company, worth US$140m. I would find that kind of skin in the game quite encouraging, if I owned shares, since it would ensure that the leaders of the company would also experience my success, or failure, with the stock.

Is Automatic Data Processing Worth Keeping An Eye On?

One positive for Automatic Data Processing is that it is growing EPS. That's nice to see. Just as polish makes silverware pop, the high level of insider ownership enhances my enthusiasm for this growth. That combination appeals to me, for one. So yes, I do think the stock is worth keeping an eye on. We should say that we've discovered 1 warning sign for Automatic Data Processing that you should be aware of before investing here.

Of course, you can do well (sometimes) buying stocks that are not growing earnings and do not have insiders buying shares. But as a growth investor I always like to check out companies that do have those features. You can access a free list of them here.

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

Valuation is complex, but we're helping make it simple.

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