ADP Stock Is Going Nowhere. Here's Why.

The business of cutting paychecks for other folks' employees isn't what it used to be -- and lately, one stock in this business has been underperforming the stock market as a whole, and performing particularly poorly relative to its peers: Automatic Data Processing (NASDAQ: ADP  ) . Why?

Three reasons.

ADP stock is worse than average
ADP shares have been on a bit of a tear these past 12 months, outperforming not just the S&P 500 in general, but also rivals Paychex (NASDAQ: PAYX  ) and Intuit (NASDAQ: INTU  ) in particular. It's a bit of a mystery, however, understanding why investors like ADP stock so much.

Turns out, when you stack up ADP stock against its two smaller rivals, there's actually precious little to recommend it. ADP's P/E ratio of 24 is no bargain. It's roughly equal to the 24-ish P/E at Paychex, and a bit more expensive than the 22 P/E at Intuit.

Worse, when you lay the three companies side by side, you can plainly see that ADP stock is the only one of the three that's currently generating less real cash profit than it reports on its income statement. Both Intuit and Paychex boast free cash flow far superior to their reported GAAP earnings.

And you can see for yourself how ADP currently has the worst free cash flow yield of the bunch:

ADP Free Cash Flow Yield Chart

ADP Free Cash Flow Yield data by YCharts.

ADP stock grows too slow
Now, it might be forgivable for ADP to produce less cash per dollar of market cap than its peers -- if the company were at least growing much faster than these peers. That way, maybe, at some time in the future, we could hope to see ADP turn the tables on its rivals -- but that's not happening.

Rather, ADP stock's historical growth rate is only in the middle of the pack:

ADP stock is going nowhere
Of course, there's still the old investing truism to consider -- that investing isn't about what a stock has done in the past, but what it might do in the future. Problem is, ADP's numbers here are no great shakes, either.

So once again, we find ADP stock occupying a place in the middle of the pack -- but actually only barely edging out Paychex in future growth, and lagging Intuit rather badly.

So to sum up, ADP isn't the cheapest of these three stocks -- that would be Intuit. It has grown and is likely to continue growing slower than Intuit. Topping it all off, ADP earns a lower operating profit margin on its revenues, and it pays a worse dividend yield (2.4%) than does Paychex (3.4%).

Despite all this, ADP stock has outperformed that of its peers over the past 12 months. But judging from the numbers, there's very little reason to expect that trend to continue in the future. To the contrary, I think it's much more likely we'll see ADP stock go exactly nowhere.

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Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 28, 2013, at 2:35 PM, peaglet wrote:

    I understand why you have 'fools' in you site name. you are some of the most stupid people when it comes to stock and company reporting. consider that ADP has been around longer than most of you have be alive and that it's one of ONLY 3 companies that has a AAA rating AND it's the biggest payroll HR/HCM company IN THE WORLD. intuit makes silly little software packages of which there are many better one in the field. Why don't you sit back and really, and I mean really, look back over the history of ADP and see what it has done for it's investors and what it continues to do. You're all idiots ath the Fool and I generally tend to avoid reading your crap. it's like they say... look at the source. idiots.

  • Report this Comment On May 28, 2013, at 4:44 PM, Marshazinger wrote:

    You really are a fool. Intuit isn't even a competitor of ADP. Paychex only competes in one segment of their market. Get your facts straight before you write an article.

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8/29/2014 3:59 PM
ADP $83.48 Down -0.02 -0.02%
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INTU $83.18 Down -0.18 -0.22%
Intuit CAPS Rating: ****
PAYX $41.65 Down -0.13 -0.31%
Paychex CAPS Rating: ****

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