Stocks Fools Love
Automatic Data Processing, Inc.

By Selena Maranjian (TMF Selena)
February 8, 2000

Trading at $46 1/2 as of February 7, 2000

New Jersey is chock full of great companies. There's the toilet titan, American Standard (okay, it does other stuff, too). A little enterprise called Lucent Technologies. A scientific company called "Merck." A few somewhat related outfits called Johnson & Johnson, Schering-Plough, Pharmacia & Upjohn, and Warner Lambert. There's AT&T, Toys "R" Us, Prudential, and Campbell Soup, Nabisco Holdings, and Bestfoods. You've probably heard of all of these.

There's another Jersey-grown company you should know about, though -- one you may not have noticed. It's called Automatic Data Processing (NYSE: AUD), or ADP.

Here's a little exercise for you. Go grab your last pay stub. Look closely at it. There's a good chance that you'll see the ADP name on it somewhere.

ADP is involved in a bunch of different business lines, but it's best known for its payroll processing service. It has capitalized on the corporate world's increasing willingness to outsource some functions, such as paycheck management. The company rakes in more than $5 billion in sales annually and services more than 450,000 clients. These clients aren't individual consumers -- they're companies, big and small.

Here's a quick summary of what ADP does -- in its own words, from its own website (Have you noticed yet that a great place to learn about a company is often at its own website?):

"At ADP, we continue to develop innovative products and services to help our customers save valuable time... make the most of their employees and resources... and boost their bottom line. This solutions-oriented approach has helped us become the world's leading provider of computerized transaction processing, data communications and information services."

The company has been around for half a century, and its services include:

  • Human resource management systems
  • Benefits and payroll processing
  • Payroll and business tax management
  • Brokerage industry desktop productivity tools, securities transaction processing and investor communication services (ADP is the world's largest provider of securities processing services in North America -- it processed more than 15% of all retail stock transactions in the U.S. and Canada in 1998.)
  • Industry-specific computing and consulting services for auto and truck dealers
  • Computerized auto repair estimating and auto parts availability
  • Fee and utilization audits of bodily injury claims
Since retaining clients is key to maintaining the company's profitability and growth rates, ADP is striving to offer "World Class Service."

You may be thinking to yourself at this point, "Alright, so it does a lot of things. But it still seems kind of boring. Why does she love this company?" Well, consider some of these facts:

ADP has reported 154 consecutive quarters of record highs in both revenues and earnings per share (EPS) since becoming a public company in 1961. It's achieved double-digit EPS growth for 38 consecutive years, through heady times and recessions alike. A company that can achieve this kind of consistent growth for several years may be well managed, or may be a fluke. But when a firm achieves it for 38 years, it's a sign that management is utterly committed to growing smoothly and steadily. (Read about its history here.) In addition, its stock price has also been on a fairly steady uphill track. Here's an impressive chart of ADP's stock price over the past decade, as compared with the S&P 500. (Did you know that the charts in our quotes and data area are very customizable? You can get them to show you all kinds of things -- give 'em a whirl.)

Another nice thing about ADP is that it isn't just offering one-time purchases to customers. While you're an ADP customer, you're repeatedly forking over moolah to the company. Each individual sale results in recurring revenue. With 450,000 clients already, where is ADP finding new companies to sign up? Well, it's increasing its international presence, for one thing. Since 1996, ADP has really been focusing on global growth, buying various businesses such as a France-based European payroll business, a Switzerland-based auto claims business and a Belgium-based car dealership business.

One more interesting feature of the company is that it is in a position to take advantage of some "float." Companies fork over money to ADP for payroll taxes. Between the time that ADP receives the money and pays it out to the IRS, ADP has the money in hand, and can earn interest on it. This can be a key source of profits in the payroll biz. Note that when interest rates rise, ADP earns more, as long as the number of employed people doesn't fall. And vice versa.

Some other numbers of interest: ADP's Foolish Flow Ratio, which measures inventory management, for fiscal 1999 is about 1.09, down a smidge from 1998's 1.10. Of course a Flowie below 1.00 is best, but this is respectable. The company's return on equity has been hovering around 20% in recent years. ADP's debt-to-equity ratio is very low, around 5%.

The company's 1999 gross margin was 57%, up from 56.4% in 1998. Its 1999 net profit margin was 12.6%, up from 12.3%. Its revenues grew 12.5% from 1998 to 1999 and its net income increased 14.6% during that period.

ADP's more recent numbers are even more impressive and promising. It just reported its second quarter earnings in late January, and its net income advanced 30% over the year-earlier period, while revenues charged ahead by 14%. Management explained that this was due to revenue from its brokerage services increasing by 43% during the quarter. One particular contract, to mail investor-relations materials, generated about $35 million.

Management is bullish. Chairman Arthur Weinbach noted, "Fiscal 2000 is off to a stronger-than-anticipated start." He expects ADP's annual revenues to increase by about 10% this year and per-share earnings to increase by 15%. The company also plans to invest about $25 million in new and Internet-related businesses this year.

If I've piqued your interest by this point, I'm glad, as this is a company well worth some further research. It's not necessarily a steal right now as it sports a somewhat steep P/E ratio. I myself don't own any shares of ADP, but it's on my watch list.

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Automatic Data Processing Company Information:
Trades on the NYSE under symbol AUD
ADP is a Motley Fool NOW 50 Index Stock

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