ADP currently trades at $301 per share and has shown little upside over the past six months, posting a middling return of 1.6%.
Does this present a buying opportunity for ADP? Or is its underperformance reflective of its story and business quality? Find out in our full research report, it’s free.
Why Does ADP Stock Spark Debate?
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.
Two Things to Like:
1. 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% over the last five years.
2. New Investments Bear Fruit as ROIC Jumps
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared 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.
One Reason to be Careful:
Weak Growth in Worksite Employees Points to Soft Demand
Revenue growth can be broken down into changes in price and volume (for companies like ADP, our preferred volume metric is worksite employees). While both are important, the latter is the most critical to analyze because prices have a ceiling.
ADP’s worksite employees came in at 751,000 in the latest quarter, and over the last two years, averaged 3% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
Final Judgment
ADP’s merits more than compensate for its flaws, but at $301 per share (or 28.4× forward P/E), is now the time to initiate a position? See for yourself in our full research report, it’s free.
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