Automatic Data Processing: $ADP Cash Flow Valuation Update

Current Price: ~ $58/share
Yield: ~ 2.73%


ADP competes in the human resources administration services industry. The firm provides services that satisfy companies' human resources needs, such as payroll processing and benefits administration. The firm was founded in 1949 and has its headquarters in Roseland, N.J. It serves more than 560,000 clients with 57,000 employees worldwide.      

Estimated WACC for the firm today is 9.89% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year	FCF $Millions
2003	1431
2004	1188
2005	1237
2006	1402
2007	975
2008	1509
2009	1309
2010	1455
2011	1428
2012	1661

Average Annual Growth FCF: ~ 4%

CAGR FCF: ~ 2%

Consensus Forecast Industry 5-Year Growth: ~ 19% per year

Consensus Forecast Company 5-Year Growth: ~ 9% per year

Internal Growth Rate: ~ 2%

Sustainable Growth Rate: ~ 11.5%

Scenario 1
Average FCF (2012, 2011, 2010) is $1515 million

• Start at $1515 million FCF
• Assume a 5-year growth rate in FCF of 9% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	1515
1	1651
2	1800
3	1962
4	2139
5	2331
Terminal Value	25701

The firm's future free cash flows, discounted at a WACC of 9.89%, give a present value for the entire firm (Debt + Equity) of $23435 million. If the firm's fair value of debt is estimated at $17 million, then the fair value of the firm's equity could be $23418 million.  $23418 million / 485 million outstanding shares is approximately $48 per share and a 20% margin of safety is $38/share.

Scenario 2
All else being equal,

• Assume a 5-year growth rate in FCF of 9% per year, then 2.50% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	1515
1	1651
2	1800
3	1962
4	2139
5	2331
Terminal Value	34400

• Present Value of the entire firm (Debt + Equity): $28865 million
• Value of Equity: $28848 million or $59/share
• 20% margin of safety is $47/share

Sources

Morningstar.com

Yahoo! Finance

Automatic Data Processing

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Automatic Data Processing: $ADP cash flow valuation

Current Price: ~ $56/share
Projected Yield: ~ 2.88%



ADP competes in the human resources administration services industry. The firm provides services that satisfy companies' human resources needs, such as payroll processing and benefits administration. The firm was founded in 1949 and has its headquarters in Roseland, N.J. It serves more than 550,000 clients with 46,000 employees worldwide.      

I estimated the firm's WACC today at 8.82% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year	FCF $Millions
2002	1276
2003	1431
2004	1188
2005	1237
2006	1402
2007	975
2008	1509
2009	1309
2010	1455
2011	1428

Average Annual Growth FCF: ~ 4%

CAGR FCF: ~ 1%

Consensus Forecast Industry 5-Year Growth: ~ 20% per year

Consensus Forecast Company 5-Year Growth: ~ 10% per year

Internal Growth Rate: ~ 2%

Sustainable Growth Rate: ~ 11%

Scenario 1

Starting at $1428 million FCF, assuming the company achieves a 5-year growth rate in FCF of 10% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	1428
1	1571
2	1728
3	1901
4	2091
5	2300
Terminal Value	28678

The firm's future cash flows, discounted at a WACC of 8.82%, give a present value for the entire firm (Debt + Equity) of $26167 million. If the firm's fair value of debt is estimated at $26 million, then the fair value of the firm's equity could be $26141 million.  $26141 million / 489 million outstanding shares is approximately $53 per share and a 20% margin of safety is $42/share.

Scenario 2

All else being equal, assume the company achieves a 5-year growth rate in FCF of 10% per year, then growth in FCF of 2.50% per year forever: :

Discounted Cash Flow Valuation

Year	FCF $Millions
0	1428
1	1571
2	1728
3	1901
4	2091
5	2300
Terminal Value	40019

The firm's future cash flows, discounted at a WACC of 8.82%, give a present value for the entire firm (Debt + Equity) of $33599 million. If the firm's fair value of debt is estimated at $26 million, then the fair value of the firm's equity could be $33573 million.  $33573 million / 489 million outstanding shares is approximately $69 per share and a 20% margin of safety is $55/share.

Sources

Morningstar.com

Yahoo! Finance

Automatic Data Processing

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.