ADP has had an impressive run over the past six months. While the S&P 500 has been flat, the stock has returned 7% and now trades at $296.12. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now still a good time to buy ADP? Or are investors being too optimistic? Find out in our full research report, it’s free.
Why Does ADP Spark Debate?
Processing one out of every six paychecks in the United States, ADP (NASDAQ: ADP) provides cloud-based human capital management solutions that help businesses manage payroll, benefits, talent acquisition, and HR administration.
Two Positive Attributes:
1. Long-Term Revenue Growth Shows Momentum
A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, ADP grew its sales at a decent 6.6% compounded annual growth rate. Its growth was slightly above the average business services company and shows its offerings resonate with customers. 
2. New Investments Bear Fruit as ROIC Jumps
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, ADP’s ROIC has increased significantly. This is a great sign when paired with its already strong returns. It could suggest its competitive advantage or profitable growth opportunities are expanding.
One Reason to be Careful:
Weak Growth in Worksite Employees Points to Soft Demand
Revenue growth can be broken down into changes in price and volume (for companies like ADP, our preferred volume metric is worksite employees). While both are important, the latter is the most critical to analyze because prices have a ceiling.
ADP’s worksite employees came in at 751,000 in the latest quarter, and over the last two years, averaged 2.8% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
Final Judgment
ADP’s positive characteristics outweigh the negatives, and with its shares beating the market recently, the stock trades at 28.5× forward price-to-earnings (or $296.12 per share). Is now a good time to buy? See for yourself in our comprehensive research report, it’s free.
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