6 Reasons Why Automatic Data Processing (ADP) Stock is a Buy

A prudent investment decision involves buying well-performing stocks at the right time while selling those that are at risk. A rise in share price and strong fundamentals signal a stock’s bull run.

Automatic Data Processing, Inc. ADP is an outsourcing stock that has performed well in 2018 and has the potential to sustain the momentum in the near term.  

What Makes it an Attractive Pick?

An Outperformer: Shares of ADP have gained 34.6% in the past year, outperforming 19.1% rise of the industry it belongs to and 4.5% gain of the Zacks S&P 500 composite.

Solid Zacks Rank: ADP carries a Zacks Rank #2 (Buy). Our research shows that stocks with a Zacks Rank #1 (Strong Buy) or #2 offer attractive investment opportunities for investors. Thus, the company is a compelling investment proposition at the moment. You can see the complete list of today’s Zacks #1 Rank stocks here.

Northward Estimate Revisions: The direction of earnings estimate revisions serves as an important pointer when it comes to the price of a stock. The Zacks Consensus Estimate for 2019 earnings has moved up 2.1% over the past 90 days. The same for 2020 has moved up 0.8%.

Positive Earnings Surprise History: ADP has an impressive earnings surprise history. The company outpaced the consensus mark in each of the trailing four quarters, delivering average positive earnings surprise of 7.6%.

Strong Growth Prospects: The Zacks Consensus Estimate for current-quarter earnings is pegged at $1.69, indicating year-over-year growth of 11.2%. Moreover, earnings are expected to register 23.2% growth in 2019 and 11.6% in 2020. The stock has an expected long-term (three to five years) earnings per share growth rate of 12.8%.

Driving Factors: ADP has been strengthening its foothold in the global human capital management (HCM) market through strategic acquisitions like Celergo, WorkMarket, Global Cash Card and The Marcus Buckingham Company. These buyouts will strengthen ADP’s customer base and help it expand operations in international markets. The company continues to pursue acquisitions that strategically fit its overall business mix and are easy to integrate over the long term.

The company has a strong business model, high recurring revenues, good margins, robust client retention and low capital expenditure. Moreover, it has a strong cash generating ability that allows it to pursue growth in areas that exhibit true potential. ADP has a strong pipeline for new business bookings. Also, it continues to innovate, improve operations and invest in the sales force.

Effective management execution has helped ADP build cash and cash equivalents of $2.79 billion as of Dec 31, 2018. The company continues to use excess cash to aggressively buy back shares and pay dividends. In the first six months of fiscal 2019, the company paid dividends worth $605 million and repurchased shares worth $526.6 million. We believe that this strong cash position will not only help ADP to continue with its shareholder-friendly activities but also pursue strategic acquisitions and investments on product development in the long run.

Other Stocks to Consider

Some other top-ranked stocks in the broader Zacks Business Services sector are Insperity NSP, Omnicom OMC and Robert Half RHI. While Insperity sports a Zacks Rank #1, Omnicom and Robert Half carry a Zacks Rank #2. Long-term expected EPS (three to five years) growth rate for Insperity, Omnicom and Robert Half is 18%, 6.9% and 8.4%, respectively.