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Here's Why You Should Hold Automatic Data Processing Stock

Zacks Equity Research

Automatic Data Processing, Inc. ADP has gained 14.3% over the past year compared with the 8.4% growth of the industry it belongs to and 2.4% rise of the Zacks S&P 500 composite.

The company has a long-term expected earnings per share (three to five years) growth rate of 13%. Moreover, earnings are expected to register 12.8% growth in 2019 and 2020 each.

Factors Driving ADP

ADP is strengthening its foothold in the global human capital management (HCM) market through strategic acquisitions like Celergo, WorkMarket, Global Cash Card and The Marcus Buckingham Company. These buyouts have driven the company’s customer base and helped it expand operations in international markets. It continues to pursue acquisitions that strategically fit its overall business mix and are easy to integrate over the long term.

The company boasts a strong business model, high recurring revenues, good margins, robust client retention and low capital expenditure. Its strong pipeline of new business bookings is an added positive. The company has streamlined its business to strengthen its core-operations in the long run. Also, it continues to innovate, improve operations and invest in its ongoing transformation efforts.

As part of its transformation initiatives, ADP has launched differentiated "Next Gen" platforms aimed at strengthening its position in HCM innovation, and improving its U.S. up-market and international product suite. The company’s other notable and recent transformation-related achievements include accelerated DataCloud penetration, increased investment in inside sales, mid-market migrations, service alignment initiatives and voluntary early retirement program. Backed by these initiatives, it is witnessing margin expansions and improvement in innovation abilities.

Risks

ADP is seeing increase in expenses as it continues to acquire companies and invest in transformation efforts. PEO Services benefits pass-through costs and selling expenses are also on rise. This is likely to keep the bottom line under pressure going forward.

The company faces significant competition in each of its product lines. Both its Employer services and PEO services segments compete with other independent business outsourcing companies in most of their operating regions. Failure to remain technologically updated might reduce the demand for its solutions and services.

Zacks Rank & Stocks to Consider

ADP currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the broader Zacks Business Services sector are Huron Consulting HURN, Charles River Associates CRAI and Fiserv FISV. While Huron Consulting and Charles River Associates sport a Zacks Rank #1, Fiserv carries a Zacks Rank #2 (Buy).

Long-term earnings (three to five years) growth rate for Huron Consulting, Charles River Associates and Fiserv is estimated 15.6%, 13% and 12%, respectively.

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