ADP Bets on Small Businesses to Beat Dismal Jobs Reports
ADP recently reported that job creation is slowing, which could spell a troubling trend for the largest payroll processor in the U.S. The number of jobs created dropped to 114,000 in July from 145,000 in June, ADP reported. In addition, employers cut more than 66,000 jobs in July, according to consulting firm Challenger, Gray & Christmas.
But recent moves to focus more on small businesses -- which are creating the bulk of the new jobs -- support a brighter outlook for the company.
We have recently revised our Trefis price estimate for ADP to $56.65 per share, which is approximately 15% above the market price, based on the company's fourth-quarter earnings and its reported forecasts for 2012.
Despite concerns in the job market, we are bullish on ADP for the following reasons:
1. ADP Focusing on Small Businesses as They Add Jobs
Small businesses have been increasing hiring for nearly two years now, according to the ADP report. Companies with fewer than 50 employees added 58,000 jobs nationwide in July, while businesses with 50 to 500 workers hired 47,000 people -- and only 9,000 new positions came from large firms with more than 500 staffers, according to the study. It's also worth noting that as many as 57% of July's layoffs came from just five companies, implying that the job scenario at small businesses is actually not bad.
Identifying the increasing importance of small business clients, ADP has been ramping up its service offerings to the segment. With small businesses leading the trend towards increasing mobility, ADP launched its popular payroll-management platform for small business on the iPhone and Android smartphones. (See ADP Targets Small Business Clients through Android Payroll Platform.)
As ADP continues to expand and refine its services to better cater to small businesses, its number of small-business clients can be expected to rise in the future.
2. Expanding Non-Payroll Services to Drive Revenue Growth
ADP expects high-single-digit revenue growth in the 2012 fiscal year, backed by its solid sales performance and investment in product innovation. Even more encouraging is the fact that the revenues are expected to increase across the segments. In particular, revenues from human-resources outsourcing and other professional-employer services are expected to grow by more than 15%. ADP's recent push beyond payroll services -- including human resources, recruiting and talent management, background checks and benefits administration -- could help drive that growth.
With more services to offer, the fee that ADP charges per worksite employee will likely rise in the future.Trefis is an online investment research platform targeted toward individual and professional investors. Trefis also includes a community of users that can create and share their models and analysis on trefis.com.
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