Shareholders of ADP would probably like to forget the past six months even happened. The stock dropped 33.5% and now trades at $188.95. This may have investors wondering how to approach the situation.
Following the drawdown, is this a buying opportunity for ADP? Find out in our full research report, it’s free.
Why Are We Positive On ADP?
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.
1. Long-Term Revenue Growth Shows Strong Momentum
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Thankfully, ADP’s 7.8% annualized revenue growth over the last five years was solid. Its growth beat the average business services company and shows its offerings resonate with customers.
2. Excellent Free Cash Flow Margin Boosts Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
ADP has shown terrific cash profitability, enabling it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the business services sector, averaging 20.7% over the last five years.
3. New Investments Bear Fruit as ROIC Jumps
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
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. Fortunately, 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.
Final Judgment
These are just a few reasons ADP is a rock-solid business worth owning. With the recent decline, the stock trades at 17× forward P/E (or $188.95 per share). Is now a good time to initiate a position? See for yourself in our full research report, it’s free.
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