ADP's Big Buyback

As talk of constriction in the credit markets begins to subside, Wall Street appears to be getting back on board with buybacks. Activision Blizzard (Nasdaq: ATVI  ) announced last month that after conducting a stock split, it will move to immediately repurchase $4 billion of the smaller stubs. Broadcom (Nasdaq: BRCM  ) , meanwhile, is spending a good billion on itself.

And on Thursday, ADP (NYSE: ADP  ) , announced a mega-repurchase of nearly 10% of its shares outstanding. With 8.6 million shares remaining from previous authorizations, the nation's leading payroll processor has confirmed its intention to buy back as many as 50 million shares more. That makes for a $2.6 billion outlay of cash if implemented in full. But after working out the math of the announcement, we're still left with two questions.

Can it pay?
Just about, yeah. ADP has $1.6 billion lying around collecting dust (and interest) right this moment, against debt of just $52 million. Management could theoretically implement the bulk of the buyback at will.

As for the $1 billion worth of shares remaining to be purchased after ADP cleans out its piggy bank, well, the company's copious cash production should make short work of that. ADP hasn't yet provided a cash flow statement for its most recent fiscal year, but we know the company has consistently generated $1 billion or more in annual free cash flow every year this side of Y2K. And now, the second question …

Should it pay?
Before I address this question, let's take a look at what the shares of a few ADP competitors are fetching:

Company

Price-to-Earnings

Price-to-Free Cash Flow

Projected Growth Rate

ADP

19

18

13%

Administaff (NYSE: ASF  )

15

29

15%

Paychex (Nasdaq: PAYX  )

22

20

14%

EDS (NYSE: EDS  )

20

9

10%

At first glance, I have to say that ADP's shares don't look particularly compelling today. Rival Administaff looks cheaper on a PEG basis, and EDS's shares are positively enticing at a 0.9 price-to-free cash flow-to-growth ratio.

On the other hand, Administaff doesn't seem to be generating the cash to back up its apparent GAAP profits. And EDS -- well, that train has already left the station. Meanwhile, ADP carries lower P/E and price-to-free cash flow ratios than does archrival Paychex, with growth estimates that are practically neck-and-neck.

Foolish takeaway
With ADP valued at roughly the same level as Paychex but commanding a sizeable lead in market share, I can see why management might want to buy a little bit more of its own shares today. I see the shares fairly priced, at best, but I'd suggest that Foolish bargain shoppers -- less interested in propping up ADP's share price, and more interested in earning profits on their investments -- hold out for better prices.

Administaff is a Motley Fool Hidden Gems PayDirt recommendation. Paychex is a Motley Fool Income Investor selection. Administaff is also a Motley Fool Inside Value pick. Activision Blizzard is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Rich Smith owns no shares of any company named above. The Motley Fool has a disclosure policy.


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  • Report this Comment On August 18, 2008, at 3:36 PM, Gravnam wrote:

    "Activision Blizzard (Nasdaq: ATVI) announced last month that after conducting a stock split, it will move to immediately repurchase $4 billion of the smaller stubs."

    Did Activision Blizzard not announce a tender offer just before the split? - Also the tender offer was lower than the actual trade price during the tender offer period. The tender offer is over btw. the buyback of the table.

    Was this crappy research?

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