Streetwise for Sunday, March 3, 2019

If you are glancing up to see if the sky is falling, consider that a funny thing happens on the way to Wall Street…stocks over time outperform other investments. 

The key reason behind long-term share price performance is that businesses retain some portion of their earnings, which they then reinvest to generate additional earnings and dividends. Driving it all is the basic theory of compounding. And yes, there is a correlation between rising dividends and rising share prices.

Therefore, there are always opportunities for increasing your wealth through stock investment. Consider, for example, Automatic Data Processing (ADP), a company I have not written about for two years.

ADP’s strong second quarter, which ended December 31, 2018, and its upgraded earnings guidance has the company on track for double-digit earnings gains for the current fiscal year. The company exceeded estimates for both revenue and earnings for its fiscal second quarter. Revenue increased 8.3 percent when compared to a year ago. 

The strong results led the company to increase guidance for its full fiscal year, which ends on June 30 of this year. ADP now expects its adjusted earnings per share to increase 17 to 19 percent this fiscal year. 

The company operates two main segments: Employer Services (71 percent of total revenue) and Professional Employer Organization [PEO] Services (29 percent of total revenue). The Employer Services segment provides small to large businesses with human resources outsourcing and tech services, including cloud-based solutions. The PEO segment offers a co-employment model for human resources outsourcing solutions.

ADP is expected to grow revenue in the Employer Services segment by 5 to 6 percent this fiscal year. The expectation is that margins will show an increase of 1.75 to 2.00 percent, with new bookings growing at a rate of 6 to 8 percent. The margin growth is key because Employer Services comprises 71 percent of the company’s total revenue.

The PEO segment also looks good as ADP expects full-year revenue growth of 9 to 10 percent. However, the margins for the PEO segment are expected to remain flat this year.

ADP projecting total revenue growth of 6 to 7 percent, thereby driving double-digit gains in earnings for the fiscal year. The consensus is for earnings to increase by 21 percent this fiscal year.

ADP DataCloud is the company’s data analytics solution, a differentiating solution for human capital management, real-time data to help clients analyze patterns and trends on categories such as overtime, compensation, and turnover. 

Meanwhile, ADP DataCloud aids employers in analyzing how they compare to benchmarks, such as workforce demographics and changes, time and attendance, compensation, and ADP system usage.

ADP also offers the accounting industry its Accountant Connect solution. This allows CPAs to view and analyze their client’s payroll, tax forms, and provide them with central practice management tools.

ADP’s solutions are highly thought of and the company has a well-known name in the industry, along with the necessary resources to provide effective client solutions. 

However, it should come as no surprise that competition remains the largest risk for ADP. There are numerous companies with human capital solutions. Therefore, ADP will have to effectively upgrade and provide clients with solutions that will improve their businesses. 

The intrinsic value of the shares using a dividend discount model is $180. My earnings estimate for this fiscal year ending June 30, is $5.40 per share and $6.00 for the 2020 fiscal year, with a 12-month price target price of about $168, thereby providing a potential capital gain of about 10 percent. The shares recently closed at $152.88. There is also an indicated dividend yield of 2.07 percent.

Note to Readers:

Save the Date: I will be teaching Portfolio Management, a series of 8 classes beginning on Monday, March 11, for the Ringling’s Osher Lifelong Learning Institute. Call 941-309-5111 for registration and information.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.