Growth Road Ahead for This Payroll Stock

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The largest payroll processing firm in the US, Automatic Data Processing (NASDAQ: ADP) has been recognized as a leader in IDC MarketScape: Worldwide HR BPO 2012 Vendor Analysis. The recognition underlines the company's credibility and the level of its commitment towards its work.

For the first quarter 2013, the total revenue reported by ADP is $2.64 billion, an increase of 5% from the last year. The earnings from continuing operations came in at $302.5 million or $0.62 per share, up from $300.4 million or $0.61 per share last year. The major earning drivers were strong pays per control (up 3.3% Y/Y), strong growth in PEO (up 13% organically) and introduction of innovative products such as Vantage, RUN and Workforce NOW. However, the retention of clients for the quarter declined by 40 basis points.

Coming on to its peer group, Automatic Data Processing competes with Paychex (NASDAQ: PAYX) and Insperity (NYSE: NSP). Both HR outsourcing service providers are powering their portfolios through acquisitions and new introductions.

Paychex, the payroll company specializing in SMB businesses has purchased “ExpenseWire,” the expense management business of Rearden Commerce, which was its partner since October 2008. Improvement in Paychex One-Source Solutions is expected with the new addition that will also attract new customers. Also, the full ownership of the business will allow it to own 100% of the revenue from the product. In addition to this, Paychex has launched BuildMyBiz.com with enhanced services and options. The company considers small businesses important and valuable for its economic growth so it is focused more on expanding its portfolio and market into this segment.

Another competitor Insperity is expanding its reach in all the markets while launching and making improvements in its current services. Its competitive solution for SMB's “OrgPlus RealTime” can be accessed from anywhere. It has also introduced an improved Expense Management Tool which now includes a redesigned method for mileage entry. In addition to this, it has expanded recruiting services for all business types. The simplified and cost efficient services of Insperity not only enhances its portfolio, but also allows businesses to choose from a wide range of options which translates into greater returns.

Coming back to ADP, it is diving into new launches and is on an acquisition spree to gain the market share and enhance offerings to lure more customers.

New Products

Vantage HCM – the Cloud based suite is gaining market traction in its pilot testing with chosen clients. Vantage HCM offers a competitive suite with benefits of labor & time management and recruitment. The full swing release is expected by the beginning of 2013.

Also, its other two products RUN for small businesses and Workforce NOW version 4.0 targeted at major accounts have also received good response from the market. RUN will see more interest through its strong Cloud offering and full featured mobile applications. Also, RUN competes directly with Paychex in SMB segment where usage is more important than pricing. And therefore, ADP gains an upper hand over Paychex with its mobile apps.

Acquisitions

The acquisition of the HR subsidiary of SHPS is the second in a series of expansions to benefit administration. The acquired services should help the company to meet the increasing complexity of health care regulations in selecting the appropriate plan. Also, this will expose ADP's portfolio to absence management and reimbursement solutions and thus translate into an increasing clientele base.

Additionally to dive into the lucrative emerging markets, ADP acquired Indian HR and payroll management company Ma Foi Consulting Solutions Ltd from Ma Foi Randstad in January 2012. This deal would give ADP a strong client base of ~350 multinationals and domestic businesses. Also, it will open doors for expansion as ADP is planning to expand its market coverage in India to three folds in the next four years.

In conclusion, I believe that ADP is all set to outperform in 2013 as it will benefit from its strategic acquisitions. The deals will not only add to its portfolio and market coverage, but also reflect that it has invested well in a broad range of activities which will diversify its revenue streams. Its new launches and product enhancements will also improve its competitive positioning. The award complements its capabilities to serve its three million clientele base in HR BPO business. 


ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Automatic Data Processing and Paychex. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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