Reassessing ADP (ADP) After A 29% One-Year Share Price Decline
- If you are wondering whether Automatic Data Processing (ADP) is fairly priced or offering value right now, the key is understanding how its current share price lines up with different valuation measures.
- With the stock at US$217.21, recent returns have been mixed, including a 0.2% move over 7 days, a 16.6% decline over 30 days, a 14.1% decline year to date, a 29.1% decline over 1 year, but gains of 4.1% over 3 years and 36.4% over 5 years.
- Recent coverage of ADP has focused on its position in payroll and HR services, alongside broader commentary on how established service providers are being compared against newer competitors and evolving client needs. These themes help frame how investors are reassessing what they are willing to pay for mature, large scale platforms such as ADP.
- Right now, ADP scores 5/6 on our valuation checks, giving it a valuation score of 5. Next, we will look at how different methods arrive at that view, then finish with a way to interpret valuation that goes beyond a single number.
Approach 1: Automatic Data Processing Discounted Cash Flow (DCF) Analysis
A DCF model estimates what a company might be worth by projecting its future cash flows and discounting them back to today’s value. For Automatic Data Processing, the model used here is a 2 Stage Free Cash Flow to Equity approach.
ADP’s latest twelve month Free Cash Flow is about $4.1b. Based on analyst inputs for the next few years and then extended projections, Simply Wall St models Free Cash Flow reaching about $9.4b in 2035. The key point for you is that all of these future cash flows, expressed in dollars, are brought back to a single value in today’s terms.
On this basis, the DCF model arrives at an estimated intrinsic value of about $439.09 per share. Compared with the current share price of $217.21, this implies the stock is around 50.5% undervalued according to this method.
This is a single model and it rests on specific cash flow assumptions, but it currently points to a meaningful gap between price and estimated value.
Result: UNDERVALUED
Our Discounted Cash Flow (DCF) analysis suggests Automatic Data Processing is undervalued by 50.5%. Track this in your watchlist or portfolio, or discover 53 more high quality undervalued stocks.
Approach 2: Automatic Data Processing Price vs Earnings
For a profitable company like Automatic Data Processing, the P/E ratio is a useful way to think about value because it directly links what you pay to the earnings the business is generating today.
What counts as a “normal” P/E depends on how the market views a company’s growth prospects and risk. Higher expected growth or lower perceived risk can justify a higher P/E, while slower growth or higher risk usually line up with a lower P/E.
ADP currently trades on a P/E of 20.65x. That is very close to the Professional Services industry average of 19.91x and also close to the peer group average of 20.72x, so on simple comparisons the stock sits near the pack.
Simply Wall St’s Fair Ratio adds another layer by estimating what P/E might make sense for ADP given its earnings growth profile, profit margins, industry, market cap and risk factors. This is more tailored than a basic peer or industry comparison, which treats very different businesses as if they were the same.
ADP’s Fair Ratio is 30.02x, meaning the model suggests a higher P/E than the current 20.65x. This points to the shares being undervalued on this measure.
Result: UNDERVALUED
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Upgrade Your Decision Making: Choose your Automatic Data Processing Narrative
Earlier we mentioned that there is an even better way to understand valuation, so let us introduce you to Narratives. These are Simply Wall St Community stories where you set out your view on a company like Automatic Data Processing, link that story to a specific forecast for revenue, earnings and margins, and arrive at a Fair Value that you can compare against today’s price. This all takes place within an easy tool on the Community page that updates automatically when new earnings or news arrive. For ADP, one investor might build a Narrative around payroll as a durable cash generator with a Fair Value near US$387.77 per share, while another focuses on competition and more modest assumptions with a Fair Value closer to US$259.70. By seeing these side by side, you can quickly judge which story and price to align your own decisions with.
Do you think there's more to the story for Automatic Data Processing? Head over to our Community to see what others are saying!
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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