We've been asking ourselves recently if the market has placed a fair valuation on Automatic Data Processing. Let's dive into some of the fundamental values of this large-cap Technology company to determine if there might be an opportunity here for value-minded investors.
Automatic Data Processing's Valuation Is in Line With Its Sector Averages:
Automatic Data Processing, Inc. provides cloud-based human capital management solutions worldwide. The company belongs to the Technology sector, which has an average price to earnings (P/E) ratio of 27.16 and an average price to book (P/B) ratio of 6.23. In contrast, Automatic Data Processing has a trailing 12 month P/E ratio of 26.1 and a P/B ratio of 26.01.
Automatic Data Processing's PEG ratio is 1.99, which shows that the stock is probably overvalued in terms of its estimated growth. For reference, a PEG ratio near or below 1 is a potential signal that a company is undervalued.
Growing Revenues With a Flat Capital Expenditure Trend:
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |
|---|---|---|---|---|---|---|
| Revenue (MM) | $13,274 | $14,110 | $14,590 | $15,005 | $16,498 | $18,012 |
| Gross Margins | 18% | 21% | 21% | 22% | 23% | 24% |
| Operating Margins | 16.0% | 21.0% | 22.0% | 22.0% | 23.0% | 25.0% |
| Net Margins | 14.0% | 16.0% | 17.0% | 17.0% | 18.0% | 19.0% |
| Net Income (MM) | $1,885 | $2,293 | $2,466 | $2,598 | $2,949 | $3,412 |
| Net Interest Expense (MM) | $103 | $130 | $148 | $96 | $83 | $253 |
| Depreciation & Amort. (MM) | $378 | $409 | $480 | $511 | $515 | $549 |
| Earnings Per Share | $4.25 | $5.24 | $5.7 | $6.07 | $7.0 | $8.21 |
| Diluted Shares (MM) | 443 | 438 | 433 | 428 | 421 | 416 |
| Free Cash Flow (MM) | $2,309 | $2,526 | $2,854 | $2,915 | $2,925 | $4,001 |
| Capital Expenditures (MM) | $206 | $162 | $173 | $179 | $174 | $206 |
| Net Current Assets (MM) | -$2,360 | -$2,330 | -$1,764 | -$2,946 | -$5,323 | -$5,291 |
| Long Term Debt (MM) | $2,002 | $1,003 | $1,994 | $2,986 | $2,988 | $2,989 |
| Net Debt / EBITDA | 9.38 | 7.42 | 6.04 | 7.35 | 7.66 | 6.65 |
Automatic Data Processing has growing revenues and a flat capital expenditure trend, a pattern of improving cash flows, and a strong EPS growth trend. However, the firm suffers from slimmer gross margins than its peers and a highly leveraged balance sheet. Finally, we note that Automatic Data Processing has average net margins with a positive growth rate.
