10 February 2007

ADP: Analysis through Dec 2006

We have updated our analysis of ADP using the data in the 10-Q report for the quarter that ended 31 December 2006. This latest quarter was the second quarter of ADP's 2007 fiscal year. Our analysis after the September quarter is available for reference.

The disclosures in the recent 10-Q report exemplify the challenges faced by independent analysts. ADP has restated earlier financial statements to account for the sale of various business segments. In addition, the company has changed the way it accounts for Depreciation and Amortization expenses, and this change led to revisions of Costs of Revenue and Sales, General, and Administrative (SG&A) expenses. Unfortunately, there isn't a published library of consistently expressed results for previous quarters. Since our methodology looks for operationally significant changes in the financial results, inconsistent data can obscure the changes we want to find and make insignificant changes appear more important than they are.

These financial restatements will be dwarfed by those to come when ADP completes its previously reported plan to spin-off its Brokerage Services business into an independent publicly traded company ("Broadridge"). While pro forma financial data will be made available, it won't be enough for us to analyze the remaining elements of ADP or the new company to the depth we prefer.

For the record, and with the caveat that the aforementioned data inconsistencies might skew the results, we gauged ADP's financial condition to be the following after the quarter ending 31 December 2006:

Cash Management: 13/25
Growth: 17/25
Profitability: 8/25
Value: 2/25
Overall: 30/100

The solid Growth score was achieved despite a 16 percent drop in Cash Flow from Operations on a year-over-year basis. The score can be attributed to good increases in Revenue, Revenue/Assets, and Net Income.

Our most attentive readers will recall that we discount the significance of Net Income increases that can't be attributed to improved CFO. The Accrual Ratio is our indicator of this situation, and it is one of the reasons for the mediocre Profitability score.

The dreadfully weak Value score signals the stock price has become quite expensive. Does it merit a PEG over 2 and a P/E that is almost 50 percent above the S&P 500?

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