ADP Stock Is Going Nowhere. Here's Why.

The business of cutting paychecks for other folks' employees isn't what it used to be -- and lately, one stock in this business has been underperforming the stock market as a whole, and performing particularly poorly relative to its peers: Automatic Data Processing . Why?

Three reasons.

ADP stock is worse than average
ADP shares have been on a bit of a tear these past 12 months, outperforming not just the S&P 500 in general, but also rivals Paychex and Intuit in particular. It's a bit of a mystery, however, understanding why investors like ADP stock so much.


Turns out, when you stack up ADP stock against its two smaller rivals, there's actually precious little to recommend it. ADP's P/E ratio of 24 is no bargain. It's roughly equal to the 24-ish P/E at Paychex, and a bit more expensive than the 22 P/E at Intuit.

Worse, when you lay the three companies side by side, you can plainly see that ADP stock is the only one of the three that's currently generating less real cash profit than it reports on its income statement. Both Intuit and Paychex boast free cash flow far superior to their reported GAAP earnings.

And you can see for yourself how ADP currently has the worst free cash flow yield of the bunch:

ADP Free Cash Flow Yield Chart

ADP Free Cash Flow Yield data by YCharts.

ADP stock grows too slow
Now, it might be forgivable for ADP to produce less cash per dollar of market cap than its peers -- if the company were at least growing much faster than these peers. That way, maybe, at some time in the future, we could hope to see ADP turn the tables on its rivals -- but that's not happening.

Rather, ADP stock's historical growth rate is only in the middle of the pack:

ADP stock is going nowhere
Of course, there's still the old investing truism to consider -- that investing isn't about what a stock has done in the past, but what it might do in the future. Problem is, ADP's numbers here are no great shakes, either.

So once again, we find ADP stock occupying a place in the middle of the pack -- but actually only barely edging out Paychex in future growth, and lagging Intuit rather badly.

So to sum up, ADP isn't the cheapest of these three stocks -- that would be Intuit. It has grown and is likely to continue growing slower than Intuit. Topping it all off, ADP earns a lower operating profit margin on its revenues, and it pays a worse dividend yield (2.4%) than does Paychex (3.4%).

Despite all this, ADP stock has outperformed that of its peers over the past 12 months. But judging from the numbers, there's very little reason to expect that trend to continue in the future. To the contrary, I think it's much more likely we'll see ADP stock go exactly nowhere.

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The article ADP Stock Is Going Nowhere. Here's Why. originally appeared on Fool.com.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends ADP, Intuit, and Paychex and owns shares of Intuit. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Wil Sessions

When you compare the payroll segment of ADP to other competitors, you get the exact results you speak of.... However, when you come at a different angle, you see that ADP offers a PEO that has seen success for 30 years... Not to mention how Health Care Reform, and government laws change the foreground. Who wants to trust intuit for their HR Compliance with ACA and HCR? A business oner who cares for their business will see value in partnering with a strong company to help mitigate risk. The stock should well above 100, and up into the 120's... I think you'll see it hit 90 in six months, just from where the market is moving and government regulations.

October 20 2013 at 2:39 PM Report abuse rate up rate down Reply