ADP's Paycheck from More Hiring
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S&P thinks this provider of employee services will benefit from the job market's recovery and corporations' eagerness to outsource
We at Standard & Poor's Equity Research Services believe Automatic Data Processing (ADP; recent price, $42) represents a good way to play the momentum we see from increasing employment and an accelerating push by corporations to outsource nonstrategic operations associated with employees, such as payroll, health and retirement benefits, as well as recruitment and hiring. Advertisement
Information technology outsourcing has traditionally been a defensive sector relative to other IT areas, in our view. We believe recent trends in the economy -- notably improving employment statistics, a more solid investment landscape, and rising interest rates -- should benefit ADP, particularly since they're potential catalysts to top-line growth and improved margins. We also expect to see ADP benefit from a growing shift into business-process outsourcing, as it leverages several strategic partnerships, including one with SAP (SAP; 4 STARS, buy; $41).
Our 5 STARS (strong buy) recommendation on the shares is based on valuation, as well as several potential catalysts, including expected improvement in the job market, which we see aiding payroll providers such as ADP in 2005.
INTERNATIONAL REACH. Roseland (N.J.)-based ADP is the largest global provider of services related to human-resources outsourcing, payroll, tax filing, and benefits administration. ADP provides a broad range of data-processing services in four business segments: employer, brokerage, dealer, and claims. It serves over 550,000 clients and between 45 million and 50 million employees. The company processes the paychecks of nearly 30 million workers worldwide.
Its employer-services division, which accounted for 62% of revenues in fiscal 2004 (ended June), provides payroll, human-resource, benefits-administration, time and attendance, and tax filing and reporting services to more than 460,000 clients in North America, Europe, Australia, Asia, and Brazil. ADP TotalSource is the third-largest professional employer organization in the U.S., providing outsourced services to clients, including payroll, human resources, benefits and workers' compensation.
Brokerage services (21% of revenues) include securities processing, desktop productivity applications, and investor-communications services to the financial-services industry. The company is the largest provider of securities-processing services in North America. ADP handled an average of 1.4 million trades per day in fiscal 2004, 7% greater than the level of fiscal 2003. It also processed more than 850 million shareholder mailings.
RECENT ACQUISITIONS. ADP's dealer-services unit (11%) provides transaction systems, data products, and professional services to automobile and truck dealers and manufacturers worldwide. Claims services (5%) offers a broad line of products to help clients accurately estimate auto damage, bodily injury, and property claims.
ADP acquired several businesses in fiscal 2004 at an aggregate total cost of $270 million. Recent significant acquisitions include the U.S. clearing and broker-dealer services divisions of Bank of America and the 401(k) retirement services record-keeping business of Scudder Investments. ADP plans to continue making strategic acquisitions to spur growth.
During 2004, the employment landscape greatly improved, in our view, with nonfarm payrolls increasing by 2.2 million, the bulk of which was added from March through May. The year ended with unemployment stable at 5.4% and an additional 157,000 jobs added in December. In 2005, we expect to see the Bush Administration focus on adding 1.2 million more jobs. We believe that should benefit payroll providers, and especially ADP, which has the majority share of this fragmented market.
HEALTHY FORECAST. Furthermore, we expect the White House to implement a plan to lower employee-related costs including health care. We believe any effort to highlight cost-reduction efforts related to employee expenses will benefit payroll-solution providers such as ADP by raising their profile.
In our opinion, employment's growth in 2004 and its expected increase in 2005, coupled with increases in staff costs, should serve as significant catalysts for adoption of ADP's human-resource and employee-benefits services. These are designed to enable businesses to minimize the back-office costs associated with employees, while at the same time reap gains from productivity and efficiencies.
The human-resources market, estimated to increase 11%, compounded annually, by 2008, according to researcher IDC, remains fragmented, which we believe should offer ADP significant opportunity for market-share gains. The outfit has the largest share of this market, roughly 7%, trailed by Mercer (4%), Hewitt (3%), and Fidelity (3%).
STILL GROWING. In the U.S., the employer-services/human-resources market is based on 149 million employees. The international arena offers 195 million to 200 million employees. In total, the revenue opportunity in America ranges from $45 billion to $60 billion, with an additional $20 billion to $25 billion opportunity from globally. Of the U.S. pie, 25% to 30% of the targeted opportunity comes from small businesses. The midsize market accounts for the largest opportunity, ranging from 45% to 50%. Large companies make up another 25%. |
