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Here's Why You Should Retain ADP Stock in Your Portfolio

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Automatic Data Processing, Inc.’s (ADP - Free Report) shares have had an impressive run on the bourse over the past year. The stock has appreciated 43.2%, outperforming the industry’s growth of 38.7% and the Zacks S&P 500 composite’s rise of 29.9%.

The company has a long-term (three to five years) expected EPS growth rate of 12%. Its earnings are expected to increase 10.3% in fiscal 2022 and 10.6% in fiscal 2023, year over year.

What’s Behind the Rally?

ADP is strengthening its position as a human capital management (“HCM”) technology and services provider. The company is focused on delivering a complete suite of cloud-based HCM and HR Outsourcing solutions. It is expanding its international HCM and HRO businesses with established local, in-country software solutions and cloud-based multi-country solutions.

Strategic acquisitions like Celergo, WorkMarket, Global Cash Card and The Marcus Buckingham Company have strengthened ADP’s customer base and are helping it expand operations in international markets. The company continues to pursue acquisitions that strategically fit its overall business mix and are easy to integrate over the long term.

ADP has been able to accelerate DataCloud penetration, and increase investments in inside sales, mid-market migrations and service-alignment initiatives through its transformation initiatives. Through these programs, the company continues to innovate, improve operations, expand margins and enhance innovation abilities.

Some Risks

ADP's total debt to total capital ratio of 0.35 at the end of the fourth-quarter fiscal 2021 was higher than the previous quarter's 0.26. An increasing debt-to-capitalization ratio indicates that the proportion of debt to finance the company’s assets is on the rise and so is the risk of insolvency. ADP’s cash and cash equivalent balance of $2.58 billion at the end of the quarter was below the long-term debt level of $2.98 billion underscoring that the company does not have enough cash to meet this debt burden. However, the company has no short-term debt to clear off.

Zacks Rank and Stocks to Consider

ADP currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader Zacks Business Services sector are ManpowerGroup (MAN - Free Report) , Cross Country Healthcare (CCRN - Free Report)  and Genpact Limited (G - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The long-term expected earnings per share (three to five years) growth rate for ManpowerGroup, Cross Country Healthcare and Genpact is pegged at 24.2%, 9.9% and 14.7%, respectively.