Stay abreast of COVID-19 information and developments here
Provided by the South African National Department of Health
ADP: A HIGH-QUALITY
INVESTMENT OPPORTUNITY
Automatic Data Processing (ADP) is a global provider of business outsourcing solutions, offering a wide range of human resource, payroll, and tax and benefits administration services. We recently included the share in our global equity portfolios – in our view, ADP is a top-quality business with a strong market position and excellent long-term growth prospects.
ADP is very well diversified in a wide range of value-added services to employers and businesses in the following divisions:
ADP stock is trading at premium valuation levels due to its strong market positioning, excellent growth prospects and exemplary capital allocation history. We recently embraced the opportunity to invest in this high-quality company at fair value at levels below US$240.
ADP is a market leader when it comes to payroll processing for large businesses. Given few other comparable payroll-processing options, it is unlikely that large clients will abandon ADP. As per company disclosures, management believes the business services one out of every six employees in the US. Anecdotal evidence (from speaking to various clients) suggests that payroll processing is not a function a chief financial officer tends to change very often, mostly due to:
We believe that the client retention ratio of more than 90% over the past five years will be maintained by ADP, and therefore don’t foresee much change to consensus forecasts that a steady retention ratio will be maintained in the future. During its last financial year, the company experienced average retention rates of over 97%.
ADP is a well-run business with very attractive returns on capital and a highly cash-generative business model due to low capital expenditures, a very sticky client base, and economies of scale unmatched by rivals due to its size and industry-entrenched position. Free cash flow conversion is impressive, with a rate consistently above 100% versus net income. Cash flow returns significantly exceed the cost of capital.
In our view, the price-earnings derating of the stock (when the price drops due to anticipated earnings decline without an actual fall in earnings) over the past three years offered an attractive entry point for us to add the name. Historically, ADP has traded at a range of 20 to 30 times forward earnings expectations. When we invested, forward earnings expectations were at 22 times, and we believed the valuation was attractive for the quality of the business we were acquiring.
Return on invested capital is a key metric for us to determine the quality of a company. In this regard, ADP is an exceptional business, measuring above 40% over many years.
No business can operate without encountering a few headwinds. In the case of ADP, the company faces fierce competitive pressure from nimble upstarts, legacy peers, accounting software and enterprise resource planning providers. We expect new solutions will allow it to compete more aggressively on functionality, reduce software maintenance costs and provide scope for greater operating leverage.
ADP does enjoy a few dynamics that enable it to maintain high returns on capital. Among these, we expect that increased regulatory complexity, tight labour markets and growing adoption of hybrid work will underpin strong demand for ADP’s solutions, supporting a greater share of wallet and market share gains in the small and midsize market. This includes greater penetration of the outsourced payroll and human resources model. We’re confident that despite competitive challenges, these factors will enable ADP to continue providing strong shareholder returns over time.
We provide daily reporting of trades, monthly portfolio evaluations and annual tax reports to clients.
Riaan Gerber has spent 16 years in Investment Management.
Looking for a customised wealth plan? Leave your details and we’ll be in touch.
South Africa
South Africa Home Sanlam Investments Sanlam Private Wealth Glacier by Sanlam Sanlam BlueStarRest of Africa
Sanlam Namibia Sanlam Mozambique Sanlam Tanzania Sanlam Uganda Sanlam Swaziland Sanlam Kenya Sanlam Zambia Sanlam Private Wealth MauritiusGlobal
Global Investment SolutionsCopyright 2019 | All Rights Reserved by Sanlam Private Wealth | Terms of Use | Privacy Policy | Financial Advisory and Intermediary Services Act (FAIS) | Principles and Practices of Financial Management (PPFM). | Promotion of Access to Information Act (PAIA) | Conflicts of Interest Policy | Privacy Statement
Sanlam Private Wealth (Pty) Ltd, registration number 2000/023234/07, is a licensed Financial Services Provider (FSP 37473), a registered Credit Provider (NCRCP1867) and a member of the Johannesburg Stock Exchange (‘SPW’).
MANDATORY DISCLOSURE
All reasonable steps have been taken to ensure that the information on this website is accurate. The information does not constitute financial advice as contemplated in terms of FAIS. Professional financial advice should always be sought before making an investment decision.
INVESTMENT PORTFOLIOS
Participation in Sanlam Private Wealth Portfolios is a medium to long-term investment. The value of portfolios is subject to fluctuation and past performance is not a guide to future performance. Calculations are based on a lump sum investment with gross income reinvested on the ex-dividend date. The net of fee calculation assumes a 1.15% annual management charge and total trading costs of 1% (both inclusive of VAT) on the actual portfolio turnover. Actual investment performance will differ based on the fees applicable, the actual investment date and the date of reinvestment of income. A schedule of fees and maximum commissions is available upon request.
COLLECTIVE INVESTMENT SCHEMES
The Sanlam Group is a full member of the Association for Savings and Investment SA. Collective investment schemes are generally medium to long-term investments. Past performance is not a guide to future performance, and the value of investments / units / unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available on request from the manager, Sanlam Collective Investments (RF) Pty Ltd, a registered and approved manager in collective investment schemes in securities (‘Manager’).
Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. The manager does not provide any guarantee either with respect to the capital or the return of a portfolio. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in a portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of a portfolio and an investor will differ depending on the initial fees applicable, the actual investment date, date of reinvestment of income and dividend withholding tax. Forward pricing is used.
The performance of portfolios depend on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-dividend date. Portfolios may invest in other unit trusts which levy their own fees and may result is a higher fee structure for Sanlam Private Wealth’s portfolios.
All portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No. 45 of 2002. Funds may from time to time invest in foreign countries and may have risks regarding liquidity, the repatriation of funds, political and macroeconomic situations, foreign exchange, tax, settlement, and the availability of information. The manager may close any portfolio to new investors in order to ensure efficient management according to applicable mandates.
The management of portfolios may be outsourced to financial services providers authorised in terms of FAIS.
TREATING CUSTOMERS FAIRLY (TCF)
As a business, Sanlam Private Wealth is committed to the principles of TCF, practicing a specific business philosophy that is based on client-centricity and treating customers fairly. Clients can be confident that TCF is central to what Sanlam Private Wealth does and can be reassured that Sanlam Private Wealth has a holistic wealth management product offering that is tailored to clients’ needs, and service that is of a professional standard.