The outsourcing industry has been benefiting from increasing demand for expertise to improve operational efficiency and reduce costs. With growing adoption of technologies such as cloud computing and robotic process automation (RPA), innovation and speed-to-market are expected to improve going forward, driving performance of the industry.
However, high talent costs and Trump’s stringent policies on immigration are overhangs. Also, uncertainty over settlement of the trade dispute between the United States and China and macroeconomic headwinds in the emerging markets do not bode well.
Considering this backdrop, it is not a bad idea to undertake a comparative analysis of two Outsourcing Services stock — Automatic Data Processing ADP and Broadridge Financial Solutions Inc. BR. While ADP has a market capitalization of $75.2 billion, the same for Broadridge is $14.9 billion.
As the stocks carry a Zacks Rank #3 (Hold), we are using other parameters to provide investors a better insight.
Broadridge has performed impressively on the bourse year to date compared with ADP and the industry. While Broadridge’s shares have gained 35.4%, the same for ADP and the industry rallied 29.5% and 32.2%, respectively.
Earnings growth along with stock price gains is often an indication of a company’s strong prospects.
ADP’s current-quarter earnings are projected to grow 11.7% compared with the expected decline of 3.8% for Broadridge. For full-year 2019, ADP’s expected earnings growth rate of 12.8% is higher than Broadridge’s growth rate of 9.9%.
For 2020, ADP’s earnings are expected to register 12.8% growth compared with 9.6% for Broadridge. Moreover, the long-term expected earnings per share growth rate of 13% for ADP is higher than Broadridge’s growth rate of 10%.
Earnings Estimate Revisions
The direction of estimate revisions is an important pointer when it comes to the price of a stock. Based on current-year and next-year earnings estimate revisions in the last 60 days, ADP is better placed.
The Zacks Consensus Estimate for current-year earnings increased 2.2% for ADP and 0.6% for Broadridge. For the next year, the consensus estimate inched up 0.3% for ADP and 0.4% for Broadridge.
Earnings Surprise History
The earnings surprise history of a stock provides investors an idea of the stock’s performance in the previous quarters.
ADP beat estimates in all of the trailing four quarters delivering an average positive surprise of 7.1%. Broadridge delivered a negative trailing four quarter surprise of 0.39%.
Net profit margin helps investors evaluate a company’s business model in terms of pricing policy, cost structure and operating efficiency, and shows how good it is at converting revenues into profits. Hence, a strong net profit margin is preferred by all classes of investors.
With a TTM net margin of 16.82%, ADP has a lead over Broadridge’s and the industry’s TTM net margins of 12.69% and 14.81%, respectively.
Comparing the companies with each other and the industry on the basis of forward 12-month price-to-earnings (P/E), we see that ADP’s 26.62X is ahead of Broadridge’s 24.76X and the industry’s 23.52X. So, ADP looks expensive compared with Broadridge and the industry.
Our comparative analysis shows that ADP is superior than Broadridge in terms expected earnings growth, current year estimate revisions, earnings surprise history and net margin. Broadridge scores over ADP in terms of price performance and next year estimate revisions. Despite a faster share price rally year to date, Broadridge is currently undervalued compared to ADP.
Stocks to Consider
Some better-ranked stocks in the broader Zacks Business Services sector are Charles River Associates CRAI and Nielsen NLSN, each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Long-term expected earnings (three to five years) growth rate for Charles River and Nielsen is 13% and 12%, respectively.
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Nielsen Holdings Plc (NLSN) : Free Stock Analysis Report
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Broadridge Financial Solutions, Inc. (BR) : Free Stock Analysis Report
Automatic Data Processing, Inc. (ADP) : Free Stock Analysis Report
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