ADP or BR: Which Outsourcing Player is a Better Stock to Buy?

Outsourcing is the practice of transferring control of certain operations, services or processes, previously done by a company’s internal staff or resources, to a third party.

While increasing demand for technology expertise, efficiency and cost reduction has kept outsourcing industry’s revenues in good shape, rising talent costs due to competition coupled with Trump’s stringent policies on immigration could curb the industry’s growth. Notably, the industry is labor intensive and heavily dependent on foreign talent.

The Zacks Outsourcing industry is a group within the broader Zacks Business Services sector. The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates solid growth prospects in the near term. It carries a Zacks Industry Rank #84, which places it in the top 33% of more than 250 Zacks industries.

Given this backdrop, it is not a bad idea to undertake a comparative analysis of two outsourcing service providers — Automatic Data Processing, Inc. ADP and Broadridge Financial Solutions Inc. BR. While Automatic Data Processing has a market capitalization of $69.56 billion, Broadridge’s market cap is $12.64 billion.

Zacks Rank & Style Score

Currently, both the stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

However, with a VGM Score of B, Broadridge has an edge over ADP in terms of investment attractiveness. ADP has a VGM Score of C. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores.

Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 offer the best investment opportunities for investors.

Price Performance

ADP clearly scores over Broadridge in terms of price performance. So far this year, shares of ADP have gained 22.4%, outperforming the 14.7% rise of Zacks S&P 500 Composite. Broadridge has returned 13.8% in the same time frame.

Earnings Expectations

Earnings growth along with stock price gains is often an indication of a company’s strong prospects.

ADP’s current-year earnings are projected to grow 23.5% compared with 10.3% for Broadridge.  For 2020, ADP’s earnings are expected to register 11.7% growth compared with 10% for Broadridge.

Thus, ADP has an edge over Broadridge in terms of yearly projected earnings growth.

Earnings Surprise History

The earnings surprise history of a stock helps investors have an idea of the stock’s performance in the previous quarters.

ADP has an impressive earning surprise history, with earnings surpassing the Zacks Consensus Estimate in each of the previous four quarters. Broadridge has a decent earnings surprise history, having surpassed the Zacks Consensus Estimate in two of the previous four quarters.

Overall, ADP delivered a higher average positive earnings surprise of 7.6% compared with 4.3% for Broadridge.

Net Margin

Net profit margin helps investors evaluate a company’s business model in terms of pricing policy, cost structure and operating efficiency, and shows how good it is at converting revenues into profits. Hence, a strong net profit margin is preferred by all classes of investors.

ADP’s TTM net margin of 11.6% is on par with the Zacks S&P 500 Composite. It has a lead over Broadridge’s 10.2% TTM net margin.