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Here's Why You Should Hold Automatic Data Processing (ADP)

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Automatic Data Processing, Inc. (ADP - Free Report) has an expected long-term (three to five years) earnings per share growth rate of 12%. Moreover, its earnings are expected to register 5.5% growth in 2020. 

Factors Driving ADP

ADP has bolstered its stake 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 strengthened ADP’s customer base and helped 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.

It has a strong business model, high recurring revenues, good margins, robust client retention and low capital expenditure. Moreover, it has a strong cash generating ability that allows it to pursue growth in areas that exhibit true potential. Also, ADP has streamlined its business to strengthen its core operations in the long run.

The company continues to innovate, improve operations and invest in its ongoing transformation efforts.  As part of its transformation initiative, the company has launched differentiated "Next Gen" platforms aimed at strengthening its position in HCM innovation and improving its U.S. up-market and international product suite. ADP’s other notable transformation-related achievements include accelerated DataCloud penetration, increased investment in inside sales, mid-market migrations, service alignment initiatives and voluntary early retirement program.

Risks

ADP continues to witness increase in expenses as it continues to acquire companies and invest in transformation efforts. PEO Services benefits pass-through costs and selling expenses are also witnessing a rise. In fiscal 2019, ADP’s total expenses of $11.3 billion increased 3.7% year over year. Total expenses increased 7.7% year over year in fiscal 2018 and 6.2% in fiscal 2017. Hence, the bottom line is likely to remain under pressure going forward.

The company faces significant competition in each of its product lines. Failure to meet technological expectations might reduce the demand for its solutions and services, thus hampering its position in the market.

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 DocuSign (DOCU - Free Report) , SPS Commerce (SPSC - Free Report) and SailPoint Technologies Holdings, Inc. (SAIL - Free Report) . All the stocks carry 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 DocuSign, SPS Commerce and SailPoint is 47%, 15% and 15%, respectively.

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