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Here's Why You Should Hold Automatic Data Processing Stock

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Automatic Data Processing, Inc. (ADP - Free Report) has gained 3.2% over the past year against 4.6% decline of the industry it belongs to and 0.5% decline of the Zacks S&P 500 composite.

The company has a long-term expected earnings per share (three to five years) growth rate of 12%. Moreover, earnings are expected to register 13.2% growth in fiscal 2020 and 11.8% growth in fiscal 2021.

What’s Driving the Stock?

ADP boasts a strong business model, high recurring revenues, good margins, robust client retention and low capital expenditure. The company has streamlined its business to strengthen its core-operations in the long run. Its ongoing transformation efforts are aimed at improving operations, expanding margins and reducing costs.

ADP has strengthened its foothold in the global human capital management (HCM) market through strategic acquisitions like Celergo, WorkMarket, Global Cash Card and The Marcus Buckingham Company. These buyouts have driven the company’s customer base and helped it expand operations in international markets. It continues to pursue acquisitions that strategically fit its overall business mix and are easy to integrate over the long term.

Some Risks

ADP is seeing increase in expenses as it continues to invest in transformation efforts. PEO Services benefit pass-through costs and selling expenses are also on rise. This is likely to keep the bottom line under pressure going forward.

The company faces significant competition in each of its product lines. Both its Employer services and PEO services segments compete with other independent business outsourcing companies in most of their operating regions. Failure to remain technologically updated might reduce the demand for its solutions and services.

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the broader Zacks Business Services sector are Interpublic (IPG - Free Report) , Omnicom (OMC - Free Report) and Genpact (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.

Long-term expected EPS (three to five years) growth rate for Interpublic, Omnicom and Genpact is 4.5%, 5.6% and 14%, respectively.

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