03 September 2009

ADP: Financial Gauge Analysis for the June 2009 Quarter (Update)

We previously posted Automatic Data Processing's (NASDAQ: ADP) preliminary Financial Gauge scores for the June quarter.

ADP is the largest firm providing payroll and other personnel-related information technology services.   The company is also known for the monthly ADP National Employment Report on non-farm private employment.

Data from ADP's latest earnings announcement were used to calculate the scores posted earlier, but ADP later filed a more complete 10-K report.  For our purposes, Balance Sheet details and a Cash Flow statement, which was not included in the original report, were the most important additions. 

We have now updated the financial metrics that determine our scores to take advantage of the new information in the 10-K.

The latest data cut two points each from the Profitability gauge (lowering it from 17 to 15, of 25) and the Overall gauge (from 61 to 59, of 100).

The final GCFR gauge scores for the June quarter are as follows:

For the record, the updated financial metrics are listed below, with changes shown in red text.

Cash ManagementJun 2009Mar 2009Jun 20085-Yr Avg
Current Ratio (1)
Debt/CFO (years)
Inventory/CGS (days)N/AN/AN/AN/A
Finished Goods/InventoryN/AN/AN/AN/A
Days of Sales Outstanding (days)
Working Capital/Invested Capital (1)40.0%37.8%37.7%41.8%
Cash Conversion Cycle Time (days)31.636.431.434.9
Gauge Score (0 to 25)1010914
1. Excludes Funds held for clients and Client funds obligations.

We had previously estimated Days of Sales Outstanding at 44.6, so the actual figure of 43.0 days signifies slightly better-than-expected efficiency.  Similarly, our 34.1-day estimate for the Cash Conversion Cycle Time was also higher than the actual value of 31.6

These changes, both for the better, were not quite enough to add a point to the Cash Management gauges score.

GrowthJun 2009Mar 2009Jun 20085-Yr Avg
Revenue growth (1)1.0%4.6%12.5%3.4%
Revenue/Assets (2)99.6%105.6%106.9%90.8%
Operating Profit growth14.5%9.2%6.3%7.0%
CFO growth (1)-11.8%8.4%36.5%13.1%
Net Income growth (1)14.4%6.9%13.8%15.0%
Gauge Score (0 to 25)614199
1. Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters.  The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.
2. Assets excludes Funds held for clients.

We had estimated a 12.6-percent decline in Cash Flow from Operations, and the actual rate was -11.8 percent.

The 10-K states:

This decrease in cash flows from fiscal 2008 to fiscal 2009 was due to the timing of collections of accounts receivable and the timing of funding of our employee benefits program, partially offset by a decrease in pension plan contributions as compared to the prior year.

ProfitabilityJun 2009Mar 2009Jun 20085-Yr Avg
Operating Expenses/Revenue79.4%79.8%80.3%80.3%
Free Cash Flow/Invested Capital 38.1%38.4%45.8%36.3%
Accrual Ratio 0.1%-0.3%3.9%-2.0%
Gauge Score (0 to 25)15151515

The difference between the estimated 37.9 percent ratio of Free Cash Flow to Invested Capital and the actual 38.1 percent isn't significant.

However, a significant error in our estimate for Cash Used for Investment led to 5.5 percent error in the Accrual Ratio, which has been corrected above.

The error gave the illusion of a jump in earnings quality, whereas actual data shows no appreciable change.  The adjustment reduced the gauge score from 17 to 15.

ValueJun 2009Mar 2009Jun 20085-Yr Avg
P/E vs. S&P 500 P/E
Enterprise Value/Cash Flow (EV/CFO) 10.410.111.414.1
Gauge Score (0 to 25)1917147

The EV/CFO ratio changed merely from 10.5 to 10.4.

OverallJun 2009Mar 2009Jun 20085-Yr Avg
Gauge Score (0 to 100)59595744

Our earlier post indicated that the Overall Gauge score for ADP was 61 points.  The data in the 10-K allowed us to replace estimated numbers with actuals.  The result was that the Profitability gauge and Overall gauge were adjusted down by 2 points each.

Please recall our earlier note that ADP's June results are less attractive if a $120 million one-time tax benefit is excluded.  The Overall Gauge score would lose five points to 54.

Full disclosure: Long ADP at time of writing.

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