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ADP Leverages New Technology to Boost Growth

- By Nicholas Kitonyi

Shares of human resource and payroll services giant Automatic Data Processing Inc. (ADP) are up nearly 25% this year following a string of impressive results in the last several quarters.


ADP supplies companies with human resource management software globally and has recently been adapting to new technologies to serve its customers better.

The company has recently entered several key partnerships that will help drive growth. The human resource management and services market is undergoing a major disruption phase, with companies adopting new payment methods, employee data collection and management services, as well as analytics systems.

ADP is embracing these changes by teaming up with industry-leading payroll and other human resource software makers like accounting software giant Intuit Inc. (INTU). Earlier this month, the companies announced a major milestone in their ongoing collaborative relationship. Now, QuickBooks Online users can easily connect their accounting data with RUN Powered by ADP. Importantly, QuickBooks ProAdvisors will be able to access this functionality for all their clients on RUN through Accountant Connect.

This functionality will give ADP access to a wider clientele base in the small- and mid-size business space that outsources their internal accounting services to private accounting consultants, thereby boosting the company's top-line growth.

ADP is also expanding its Instant Pay and Financial Wellness Solutions after launching Wisely Now and the myWisely App last week. The two products will help the company meet the growing demand in the employment sector for alternative payment methods.

In early May, ADP released a research report that showed 79% of 4,000 employees surveyed across 13 countries would accept payment via mobile, digital or prepaid card. The report also showed that 62% of employees "say off-cycle pay options, such as the ability to choose pay frequency, would make a difference when considering a job offer."

As such, the company's decision to continue to expand Instant Pay and the Financial Wellness Solutions product line puts it ahead of the market and ready to embrace any new changes in the near future. This will be important to maintaining steady growth in the top line with shorter periods required to adapt to market trends.

All these developments will enhance ADP's open ecosystem approach, which allows clients to easily work with their preferred partners by providing access to pre-screened and pre-integrated solutions for their businesses.

During the second annual ADP Marketplace Summit, Craig Cohen, the general manager of ADP Marketplace, said, "Most businesses today are using multiple systems to manage talent and the management of that employee data across systems becomes critical to ensure that the employee experience is executed flawlessly."

This improves efficiencies in the human resource department, which in turn enhances the company's ability to retain and attract top talent.

After missing analyst expectations for revenue in the most recent quarter, ADP will be looking to improve, so some of the developments discussed could play a part.

The company's third-quarter 2019 revenue of $3.85 billion missed expectations by 25%. However, its bottom line impressed with earnings of $1.34 per share beating consensus estimates of $1.18. It also issued bullish guidance with a 19% increase in earnings forecasted for 2019. ADP now anticipates posting earnings of $5.37 per share on revenue of $14.25 billion this year.

ADP recorded a significant 170-basis point increase in the operating margin for employee services in the most recent quarter. This is a good example of what part the open ecosystem approach could play in the company's growth prospects, with improved profit margins a key element.

From a valuation perspective, ADP's growth prospects are well illustrated in its price-earnings to growth ratio of 1.76. In comparison, industry peer Workday Inc. (WDAY) trades with a PEG ratio of 3.85 while Paychex Inc. (PAYX) has a ratio of 3.10.

These are some of the factors that could convince investors to overlook the company's top-line weakness. Earnings increased by just 4% from last year. Overall, ADP looks to be in a good position to capitalize on the expected industry changes in the coming years, which will help it maintain steady growth.

Disclosure: No position in the stocks mentioned.

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This article first appeared on GuruFocus.