ADP currently trades at $293.60 per share and has shown little upside over the past six months, posting a small loss of 3.9%. The stock also fell short of the S&P 500’s 18.6% gain during that period.
Is now the time to buy ADP? Or does the price properly account for its business quality and fundamentals? Find out in our full research report, it’s free.
Why Are We Positive On ADP?
Processing one out of every six paychecks in the United States, ADP (NASDAQ: ADP) provides cloud-based human capital management solutions that help businesses manage payroll, benefits, talent acquisition, and HR administration.
1. Long-Term Revenue Growth Shows Strong Momentum
A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Luckily, ADP’s sales grew at a solid 7.1% compounded annual growth rate over the last five years. Its growth beat the average business services company and shows its offerings resonate with customers.
2. Excellent Free Cash Flow Margin Boosts Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
ADP has shown terrific cash profitability, enabling it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the business services sector, averaging 20.6% over the last five years.
3. New Investments Bear Fruit as ROIC Jumps
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Fortunately, ADP’s ROIC has increased significantly over the last few years. This is a great sign when paired with its already strong returns. It could suggest its competitive advantage or profitable growth opportunities are expanding.
Final Judgment
These are just a few reasons ADP is a high-quality business worth owning. With its shares underperforming the market lately, the stock trades at 26.9× forward P/E (or $293.60 per share). Is now a good time to buy? See for yourself in our comprehensive research report, it’s free.
Stocks We Like Even More Than ADP
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