ADP’s First Quarter 2010
ADP continues to hold steady in the current economy based on their first quarter earnings report. Revenues compared to the first quarter of 2009 declined 4% to $2.1 billion. ADP notes that net earnings from continuing operations increased 2% while diluted earnings per share from continuing operations increased 4% from $0.54 to $0.56 per share.
For the quarter, employer service revenue declined 3%, PEO revenues increased 6%, and dealer services revenues declined 4%. Revenue from interest on client funds declined 15.8% compared to the year ago period due to lower funds and lower interest rates.
For their 2010 fiscal year ADP is projecting a 1%-2% decline in revenues and earnings that are essentially flat as compared to 2009 at $2.39 per share. They anticipate no improvement in pretax margins.
With declining revenues, ADP has squeezed everything out of the business that they can with amazing results. To produce earnings growth as unemployment has grown to over 10% and as over 2,000 dealerships have closed in 2009 is a boon for shareholders. In addition, they continue to pay a solid dividend and repurchased $13.7 million in shares in the first quarter.
A look at the cash flow statement in their 10Q reveals a decline in cash flow from operating activities from $398 million in 2009 to $244 million in 2010, largely as a result of a $230 million decrease in accrued expenses and other liabilities. This should be something to watch in future quarters. Deducting $34 million in capital expenditures results in $196 million in what I would consider to be owner earnings. From this, the company paid $166 million in dividends and repurchased almost $14 million in shares. Long-term investors in ADP should be pleased with ADP’s return of capital to shareholders.
In 2009, ADP had a return on equity of 26.2%. They had operating cash flow of $1.6 billion and capital expenditures of $158 million resulting in owner earnings of $1,404.7MM. Starting with this number and assuming no growth in 2010 followed by 8% growth for years 2-5, then 6% for years 6-10, I get an intrinsic value of $40 per share after applying a 10% discount rate to these cash flows. I think ADP will do a bit better than that, but a value range of $38-$45 is a pretty good estimate.
I consider ADP a core holding. It has a solid dividend (3.10% as of this writing), shareholder friendly management, and should benefit as interest rates rise and the employment picture improves.
Disclosure: I currently hold shares of ADP
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