ADP currently trades at $292.47 per share and has shown little upside over the past six months, posting a middling return of 0.5%. However, the stock is beating the S&P 500’s 10.7% decline during that period.
Is there still a buying opportunity in ADP, or does the price properly account for its business quality and fundamentals? Find out in our full research report, it’s free.
Why Does ADP 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 Positive Attributes:
1. Long-Term Revenue Growth Shows Momentum
A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Thankfully, ADP’s 6.6% annualized revenue growth over the last five years was decent. Its growth was slightly above the average business services company and shows its offerings resonate with customers. 
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. 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 2.8% 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, and after its recent outperformance in a weaker market environment, the stock trades at 28.3× forward price-to-earnings (or $292.47 per share). Is now the right time to buy? See for yourself in our full research report, it’s free.
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