ADP's Solutions for Team National

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Automatic Data Processing Inc. (ADP) has recently signed an agreement with US-based multi-million dollar direct selling company - Team National, to provide the latter with its payroll, compliance and benefits solutions.

ADP will manage the payroll and tax functions related to Team National’s 350,000 members and will also take care of other administrative aspects of its human resource management. The solutions provided by ADP also mitigate the business risk by providing better compliance and innovative techniques to manage human resource issues.

Apart from strategic partnerships that would be incrementally beneficial for the company to grow organically, ADP’s growth in recent years has been largely attributable to accretive acquisitions, for which it has spent approximately $776 million in 2011 itself. The acquisitions have bolstered ADP’s human resources business process outsourcing portfolio and complemented the existing applicant tracking and talent management solutions, thereby boosting ADP’s customer base and top-line growth going forward.

In the recently concluded quarter, ADP’s top line was driven by strong sales from new clients, improving client retention and incremental revenue from recent acquisitions.

Employer Services revenue increased 7.0% year over year (6.0% organically) to $2.11 billion. The number of employees on clients' payrolls in the United States grew 3.3% in the quarter on a same-store-sales basis. Professional Employer Organization (PEO) Services revenue jumped 15.0% year over year to $513.7 million in the third quarter. Dealer Services revenue climbed 7.0% year over year to $431.9 million.

Moreover, the company expects its Employer Services revenue and PEO Services revenue to increase by 7% and 17% on a year-over-year basis, respectively.

This lends support to our assumption that ADP will continue to outperform the broader market based on strong new business sales, a diversified product portfolio, improving customer retention, accretive acquisitions, strong balance sheet and shareholder-friendly programs (aggressive share buybacks, dividend) over the long term.

However, we cannot discount the increasing competition from Paychex Inc. (PAYX) and a gloomy macro outlook in Europe, which are the near-term headwinds for the company.

We have a Neutral recommendation on ADP over the long term. Currently, ADP has a Zacks #3 Rank, which implies a ‘Hold’ rating on a short-term basis.

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