Automatic Data Processing vs. Trinet: Which Stock is a Better Buy?

TriNet Group, Inc. (TNET) provides human resources solutions for small and midsize businesses in the United States. The company offers multi-state payroll processing and tax administration, employee benefits programs, workers compensation insurance and claims management, and employment and benefits law compliance. On the other hand, Automatic Data Processing, Inc. (ADP) provides cloud-based human capital management solutions worldwide. It operates in two segments, Employer Services, and Professional Employer Organization.

While the resurgence of COVID-19 cases and fears over the omicron coronavirus variant pose some degree of uncertainty, historically high job openings are leading to increasing demand for staffing & employment services companies. According to the U.S. Staffing Industry Forecast, U.S. staffing revenue will grow by 16% this year to a record total of $157.40 billion. Therefore, both TNET and ADP should benefit.

TNET has gained 34.3% over the past six months, while ADP has returned 17.1%. However, ADP’s 12.5% gains over the past three months are higher than TNET’s 5.9% returns. Moreover, ADP is the clear winner with 32.9% gains versus TNET’s 20% returns in terms of the past nine months’ performance.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On October 25, 2021, Burton M. Goldfield, TNET's President and CEO, said, "Even as we further invest in our business and strengthen our ability to help our customers navigate the many HR complexities they are facing, TriNet has continued to deliver profitable growth, leveraging our scale and demonstrating operating leverage. We remain well-positioned to build on our momentum in the fourth quarter."

On November 10, 2021, the board of directors of ADP approved a $0.11 increase in the quarterly cash dividend to an annual rate of $4.16 per share. Carlos Rodriguez, ADP's president, and CEO said, “This 12% increase in our quarterly dividend represents a strong signal of the board's confidence in ADP's prospects for this fiscal year and beyond. Our dividend is a cornerstone to our long-standing commitment to shareholder-friendly actions, and we are pleased to increase it for a 47th consecutive year.”

Recent Financial Results

TNET’s revenue increased 18% year-over-year to $1.10 billion for the fiscal third quarter ended September 30, 2021. The company’s adjusted EBITDA grew 91.3% year-over-year to $132 million, while its adjusted net income came in at $87 million, representing a 123.1% year-over-year increase. Also, its adjusted EPS came in at $1.31, up 133.9% year-over-year.

ADP’s revenue increased 10% year-over-year to $3.80 billion for the fiscal third quarter ended September 30, 2021. The company’s adjusted EBIT grew 17% year-over-year to $915 million, while its adjusted net earnings came in at $699 million, representing a 16% year-over-year increase. Also, its adjusted EPS came in at $1.65, up 17% year-over-year.

Past and Expected Financial Performance

TNET’s revenue and EBITDA grew at CAGRs of 8.4% and 15.9%, respectively, over the past three years. Analysts expect TNET’s revenue to increase 10.5% for the quarter ending December 31, 2021, and 9.1% in the current year. The company’s EPS is expected to grow 22.7% for the quarter ending December 31, 2021, and 13.7% in the current year. Moreover, its EPS is expected to grow at a rate of 7.3% per annum over the next five years.

On the other hand, ADP’s revenue and EBITDA grew at CAGRs of 4.3% and 8.3%, respectively, over the past three years. The company’s revenue is expected to increase 11.4% for the quarter ending December 31, 2021, and 7.8% in the current year. Its EPS is expected to grow 7.2% for the quarter ending December 31, 2021, and 12.5% in the current year. Also, ADP’s EPS is expected to grow at a rate of 14% per annum over the next five years.

Profitability

ADP’s trailing-12-month revenue is 3.52 times what TNET generates. ADP is also more profitable with a gross profit margin and net income margin of 45.17% and 17.55% compared to TNET’s 19.86% and 6.66%, respectively

Furthermore, ADP’s ROE and ROTC of 48.33% and 25.61% are higher than TNET’s 40.73% and 18.65%, respectively.

Valuation

In terms of forward non-GAAP P/E, ADP is currently trading at 34.33x, 76.6% higher than TNET’s 19.44x. Moreover, ADP’s forward EV/EBITDA ratio of 23.62x is 86.3% higher than TNET’s 12.68x.

So, TNET is relatively affordable here.

POWR Ratings

TNET has an overall rating of A, which equates to a Strong Buy in our proprietary POWR Ratings system. On the other hand, ADP has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

TNET has a B grade for Growth, consistent with analysts’ expectations that its EPS will increase significantly in the upcoming months. On the other hand, ADP has a C grade for Growth, in sync with analysts’ expectations that its EPS will grow modestly in the near term.

Also, TNET has a B grade for Value, consistent with its forward P/CF of 13.46x, 9.7% lower than the industry average of 14.90x. However, ADP has a C grade for Value, in sync with its forward P/CF of 31.32x, 41.1% higher than the industry average of 22.19x.

Of the 46 stocks in the B-rated Outsourcing - Business Services industry, TNET is ranked #1. In comparison, ADP is ranked #20.

Beyond what I’ve stated above, we have also rated the stocks for Quality, Momentum, Stability, and Sentiment. Click here to view all the TNET ratings. Also, get all the ADP ratings here.

The Winner

The staffing & employment services industry is expected to grow with increasing demand this year and beyond. While both TNET and ADP are expected to benefit, it is better to bet on TNET now because of its lower valuation and better financials.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Outsourcing - Business Services industry here.

ADP shares were trading at $228.80 per share on Friday afternoon, down $3.63 (-1.56%). Year-to-date, ADP has gained 31.73%, versus a 21.59% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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