Today we're going to take a look at the well-established Automatic Data Processing, Inc. (NASDAQ:ADP). The company's stock received a lot of attention from a substantial price movement on the NASDAQGS over the last few months, increasing to US$173 at one point, and dropping to the lows of US$156. Some share price movements can give investors a better opportunity to enter into the stock, and potentially buy at a lower price. A question to answer is whether Automatic Data Processing's current trading price of US$169 reflective of the actual value of the large-cap? Or is it currently undervalued, providing us with the opportunity to buy? Let’s take a look at Automatic Data Processing’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change.
What's the opportunity in Automatic Data Processing?
The stock seems fairly valued at the moment according to my relative valuation model. In this instance, I’ve used the price-to-earnings (PE) ratio given that there is not enough information to reliably forecast the stock’s cash flows. I find that Automatic Data Processing’s ratio of 30.87x is trading slightly above its industry peers’ ratio of 30.81x, which means if you buy Automatic Data Processing today, you’d be paying a relatively fair price for it. And if you believe Automatic Data Processing should be trading in this range, then there isn’t really any room for the share price grow beyond what it’s currently trading. Furthermore, Automatic Data Processing’s share price also seems relatively stable compared to the rest of the market, as indicated by its low beta. This may mean it is less likely for the stock to fall lower from natural market volatility, which suggests less opportunities to buy moving forward.
What kind of growth will Automatic Data Processing generate?
Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. With profit expected to grow by 28% over the next couple of years, the future seems bright for Automatic Data Processing. It looks like higher cash flow is on the cards for the stock, which should feed into a higher share valuation.
What this means for you:
Are you a shareholder? ADP’s optimistic future growth appears to have been factored into the current share price, with shares trading around its fair value. However, there are also other important factors which we haven’t considered today, such as the track record of its management team. Have these factors changed since the last time you looked at ADP? Will you have enough confidence to invest in the company should the price drop below its fair value?
Are you a potential investor? If you’ve been keeping tabs on ADP, now may not be the most optimal time to buy, given it is trading around its fair value. However, the positive outlook is encouraging for ADP, which means it’s worth further examining other factors such as the strength of its balance sheet, in order to take advantage of the next price drop.
Price is just the tip of the iceberg. Dig deeper into what truly matters – the fundamentals – before you make a decision on Automatic Data Processing. You can find everything you need to know about Automatic Data Processing in the latest infographic research report. If you are no longer interested in Automatic Data Processing, you can use our free platform to see my list of over 50 other stocks with a high growth potential.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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