Three-Tier Business Strategy Benefits ADP, Rising Expenses Ail

ADP’s ADP shares have gained 18.5% in a year against the 4.5% and 0.6% decline of the industry and the Zacks S&P 500 composite, respectively.

The company reported impressive second-quarter fiscal 2025 results. Earnings per share of $2.4 beat the consensus estimate by 3.5% and increased 10.3% from the year-ago quarter. Total revenues of $5 billion surpassed the consensus estimate by 1.6% and grew 8.2% year over year.

How is ADP Faring?

ADP operates a three-tier business strategy that helps it sustain and grow strong as a human capital management (“HCM”) technology and services provider. The company’s prime motive is to deliver a complete suite of cloud-based HCM and HR Outsourcing solutions. ADP’s expansion strategy focuses on international HCM and HRO businesses collaborating with established local, in-country software solutions and cloud-based multi-country solutions.

The company has strengthened its customer base and is expanding operations in international markets on the back of strategic buyouts. Celergo, WorkMarket, The Marcus Buckingham and Global Cash Card are a few of the acquired companies that fit strategically with ADP’s overall business mix and easy to integrate over the long term.

The recent acquisition of Honu HR, Inc. DBA Sora (Sora) enhances ADP’s strategy to streamline HR processes via automation, coupling the former’s user-friendly platform with the latter's HCM solutions for improved efficiency and employee experiences.

In fiscal 2024, 2023, 2022 and 2021, the company paid $2.2 billion, $1.9 billion, $1.7 billion and $1.6 billion in dividends, respectively. Such moves indicate the company’s commitment to return value to shareholders and underline its confidence in business. We are anticipating steady income growth, which will generate steady cash flow, allowing the company to pay out stable dividends.

ADP's current ratio (measure of liquidity) at the end of second-quarter fiscal 2025 was pegged at 1, down from the industry's 2.54. However, a current ratio of more than 1 often indicates that the company will easily pay off its short-term obligations.

Meanwhile, the outsourcing industry is labor intensive and heavily dependent on foreign talent. The surge in talent costs due to competition could hamper the industry’s growth. ADP, being one of the companies in the industry, is expected to bear some damage.

The company has been witnessing a notable uptick in its expenditures due to ongoing acquisitions and investments in transformation projects. In fiscal 2024, it increased 6.2%, the same increased 8% and 10% in fiscal 2023 and 2022, respectively.

This trend across expenses has persisted over several years, with expenses increasing 2% in 2021, 3% in fiscal 2020, 3.7% in fiscal 2019 and a significant 7.7% in fiscal 2018. Consequently, it is anticipated that this increase in expenses will continue to pressure the company’s bottom line in the future.

ADP’s Zacks Rank & Stocks to Consider

ADP has a Zacks Rank #3 (Hold) at present.

Some better-ranked stocks are AppLovin APP and Limbach Holdings, Inc. LMB.

AppLovin sports a Zacks Rank of 1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

APP has a long-term earnings growth expectation of 20%. It delivered a trailing four-quarter earnings surprise of 23.5%, on average.

Limbach Holdings currently flaunts a Zacks Rank of 1.

LMB has a long-term earnings growth expectation of 12%. It delivered a trailing four-quarter earnings surprise of 42.3% on average.

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This article originally published on Zacks Investment Research (zacks.com).

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