ADP: Earnings Report for the Quarter Ending December 31, 2020

Automatic Data Processing reported before the market opened on January 27, 2021, it earned $1.51 per diluted share in the quarter that ended on December 31, 2020, up 1 percent from earnings of $1.50 in the same 3 months of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP). 

Adjusted net earnings (non-GAAP) were unchanged from one year earlier at $1.52 per share. The exclusions responsible for the $0.01 per share difference in the latest quarter between the GAAP and non-GAAP earnings were: Transformation initiatives [$0.01 per share].  Non-GAAP earnings, by excluding unusual and non-cash items that could obscure the results of a business's principal, ongoing operations, are intended to be cleaner measures of corporate profits.

This post compares the quarterly Income Statement published by ADP to the estimates I made in a previous “Look Ahead” post.  My estimates were based on publicly available guidance provided by ADP's management to financial analysts, news reports, and trends in the company's historical results.  Unless otherwise mentioned, all reported values mentioned below are GAAP figures.

First, a little background about the company:  ADP provides "human capital management" and human resource outsourcing services, such as payroll, benefits, and personnel management, to numerous firms around the world.  These services are increasingly cloud-based.  In the company's most recent fiscal year, ADP "processed and delivered more than 69 million employee year-end tax statements, and moved more than $2.2 trillion in client funds."

The following table is a simplified version of ADP's Income Statement for the quarter that ended in December 2020, with company-reported numbers along side my predictions.  Figures from the year-earlier quarter are also provided for comparative purposes.

Revenue in the December 2020 quarter totaled $3.7 billion, 1 percent more than last year. The Employer Services business was responsible for 68 percent of overall revenue, and this unit's revenue percent fell by 1.1 percent compared to the year-earlier result. The PEO Services business contributed 32 percent of revenue, and this unit's revenue increased by 4.5 percent.

I was expecting ADP to report revenue of $3.7 billion for the December 2020 quarter.  The actual amount  fell short of my estimate by $4.3 million (0.1 percent).

The Cost of Revenue (also known as Cost of Goods Sold) was $1.8 billion in the latest quarter, which translates into a Gross Margin of 50.0 percent of revenue.  I was expecting the Gross Margin to be 49.0 percent in the December 2020 quarter, and ADP exceeded that prediction by 1.0 percent.

ADP spent $175 million on Research and Development in the latest quarter, up from $169 million one year ago. I had estimated that R&D expenses would be $174 million.  R&D was 4.7 percent of Revenue.

Sales, General, and Administrative expenses totaled $756 million in the December 2020 quarter, up from $754 million one year ago.  SG&A expenses decreased from 20.6 percent to 20.5 percent of quarterly revenue, which shows ADP spent less per dollar of sales on indirect operational costs, such as marketing. I had estimated that SG&A expenses would be 21.0 percent of revenue, and the reported data show that the actual percentage was lower than that prediction.

ADP's Operating Income was $818 million in the quarter, down 0.4 percent from the year-earlier period.  Operating Income exceeded my $762 million estimate by $56 million.

Interest and other non-operating items summed to a net  income of $15 million.  My estimate for non-operating items was $15 million.

The effective income tax rate rose by 0.2 percent to 22.2 percent, which had a negative effect on net income.  I expected the tax rate to be 23.0 percent.

Net income in the quarter attributable to ADP was $648 million, $1.51 per share.  The figures for the year-earlier quarter were $652 million, $1.50/share. My earnings estimate for ADP in this quarter was $598 million ($1.39/share).

In summary, Automatic Data Processing earned in the December 2020 quarter more than  I had expected. The company had better than predicted Gross Margin, Operating Income growth, and Income tax rate.  

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

 #adp  #gauges  #gcfr  #gcfr2 #QtrlyRpt   #nac_financialanalysis 

ADP: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Automatic Data Processing's earnings for fiscal 2021's second quarter, which ended on December 31, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between. 

Once the company’s official results become available on January 27, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before we get into the details, let's take a step back and start with background information about ADP.

ADP provides "human capital management" and human resource outsourcing services, such as payroll, benefits, and personnel management, to numerous firms around the world.  These services are increasingly cloud-based.  In the company's most recent fiscal year, ADP "processed and delivered more than 69 million employee year-end tax statements, and moved more than $2.2 trillion in client funds."

Shares of ADP now trade for about $176 each.  These shares can be found in the Standard and Poors 500, Standard and Poors Dividend Aristocrats, NASDAQ 100, and Russell 1000 stock indices.

ADP recorded profits of $2 billion on revenue of $15 billion during the last year. In the quarter that ended on 30 September 2020, ADP earned $1.41 per share (excluding certain items), which significantly beat the $0.96 Wall Street consensus forecast. See https://tinyurl.com/y4jsk38m for ADP's most recent quarterly report.

Revenue in the September 2020 quarter totaled $3.5 billion, 1% less than last year's $3.5 billion. The Employer Services business was responsible for 68% of overall revenue, and this unit's revenue fell by 2.6% compared to the year-earlier result. The PEO Services business contributed 32% of revenue, and this unit's revenue grew by 3.7%.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

ADP management communicated their expectations for the December 2020 quarter last October. 

The guidance indicates that the company expects fiscal 2021 revenue to match fiscal 2020 revenue, which was $14.6 billion, give or take 1 percent.  In the first quarter of fiscal 2021, ADP recorded revenue of $3.47 billion, down 0.7 percent.  It seems reasonable to conclude that second quarter revenue should also be more or less the same as the year-earlier figure, $3.67 billion.  I rounded up to $3.7 billion.

ADP also forecast margins lower than last year by 1 to 1.5 percent, which can be modeled by increasing costs relative to revenue.  The tax rate and EPS guidance is also helpful and seems realistic.

The following baseline Income Statement takes into consideration the information mentioned above and trends seen in the company's historical results.  Earnings are estimated to be $598 million ($1.39 per share).

Please note that my organization of revenues, expenses, gains, and losses, which I use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

 #adp  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

Automatic Data Processing: Gauge Analysis for Value Investors (updated 1 November 2020)

I have analyzed ADP's financial statements to determine whether the reported figures suggest that the company's shares are a good value and reasonable risk for prudent investors. The way I performed this analysis was inspired by Benjamin Graham's recommendations in "The Intelligent Investor," which was first published in 1949 and is still one of the best-known books about value investing. I modified Graham's specific suggestions to fit modern times; however, the goal is the same: find stocks that are inexpensive relative to the company's strengths and aren't excessively risky.

"The analysis evaluates investment suitability by gauging how well the company satisfies seven criteria.  GREEN, YELLOW, and RED grades indicate whether each gauge is fully satisfied, partially satisfied, or not satisfied at all.  An Overall Score between zero and 100, which takes the details of all gauges into account, is also computed.  While the analysis includes both growth and value criteria, the calculation is weighted to favor companies that exhibit good value characteristics over firms that are fast growers but expensive.

An Overall Score of 60 or higher is a good result, and it signifies that the company has enough value-investment appeal to be worth examining in more detail. "

First, a quick review of the company itself.

ADP provides "human capital management" and human resource outsourcing services, such as payroll, to numerous firms around the world.  These services are increasingly cloud-based.  The company is also known for the monthly "ADP National Employment Report" showing changes in total U.S. non-farm private employment.  ADP and the activist fund Pershing Square waged an expensive proxy war for control of the company, which ADP's board of directors ultimately won, but Pershing departed with a substantial profit. 

ADP recorded profits of $2 billion on revenue of $15 billion during the last year. In the quarter that ended on 30 September 2020, ADP earned $1.41 per share (excluding certain items), which significantly beat the $0.96 Wall Street consensus forecast. See https://tinyurl.com/y4jsk38m for ADP's most recent quarterly report.

Shares of ADP now trade for about $158 each.  These shares can be found in the Standard and Poors 500, Standard and Poors Dividend Aristocrats, NASDAQ 100, and Russell 1000 stock indices.

Analysis Results:

ADP's grades on the seven investment criteria are listed below, along with some of the financial figures that influenced these color assignments

1. The Company's Size is Substantial: GREEN

    Market Value: $67.9 billion (large cap)

2. The Company is Conservatively Financed: RED

    Current ratio = 1.5 (>2.0 is conservative)

    Long-term debt/Working Capital = 122% (<150% is conservative)

3. The Company Generates Stable Earnings: GREEN

    Twenty positive quarterly earnings reports in last 5 years (perfect)

    Earnings variability = N/A (negligible)

4. The Company Exhibits Earnings Growth: GREEN

    Owner Earnings growth rate (trailing year) = 6% (modest)

    Owner Earnings growth rate (five-year average) = 23% (very good)

    Free Cash Flow growth rate (trailing year) = 4% (weak)

    Free Cash Flow growth rate (five-year average) = 13% (good)

5. The Company is Efficiently Profitable: GREEN

    Cash Flow Return On Invested Capital = 33% (very good)

    Operating Profit/Sales = 21.8% (excellent)

6. The Company Pays a Healthy Dividend: GREEN

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = 15% (very good)

    Dividend = 54% of last year's FCF (sustainable)

7. The Company's Shares are Fairly Valued: RED

    Price/Owner Earnings (last year) = 17.6 (moderate to pricey)

    Price/GAAP Earnings (five-year average) = 34.3 (expensive)

    Free Cash Flow/Market Value = 4.3% (modest, more than the five-year average of 4.1%)

    Acquirer's Multiple = 21.5 (expensive)

    Price/Book Value = 11.7 (about the same as its five-year average)

    Price/Sales = 4.7 (more expensive than the five-year average of 4.2)

In summary, the analysis assigned Automatic Data Processing five GREEN, zero YELLOW, and two RED grades.  The resulting Overall Score is 49 of the 100 possible points, which is unappealing.  The score is below the 60-point threshold, and, therefore, ADP does not qualify at this time for consideration by value investors.

Check back here occasionally for updates to the Overall Score, which can change when the company releases new financial results and when there's a signifcant change in the company's share price.

This analysis reported here is not, by any means, a complete evaluation of the subject company, and it does not consider all material facts about the company's operations, finances, or future prospects. The analysis relies on publicly available financial data assumed, but not guaranteed, to be accurate. Readers are encouraged to independently verify all data. Other analytical approaches and screening criteria will be more applicable to investors having different goals, circumstances, and tolerance for investment risk.  The analysis is not and should not be considered investment advice, nor does it constitute an offer or solicitation to buy or sell any security. The author might have a long or short position in the subject company and/or its competitors. The methodology and results are subject to change without notification.

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