Stock Analysis on Net
Stock Analysis on Net

Automatic Data Processing Inc. (NASDAQ:ADP)

This company has been moved to the archive! The financial data has not been updated since April 29, 2022.

Present Value of Free Cash Flow to Equity (FCFE) 

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In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company asset base.

Intrinsic Stock Value (Valuation Summary)

Automatic Data Processing Inc., free cash flow to equity (FCFE) forecast

US$ in thousands, except per share data

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Year Value FCFEt or Terminal value (TVt) Calculation Present value at 11.12%
01 FCFE0 3,577,000
1 FCFE1 4,165,142 = 3,577,000 × (1 + 16.44%) 3,748,456
2 FCFE2 4,750,835 = 4,165,142 × (1 + 14.06%) 3,847,823
3 FCFE3 5,305,789 = 4,750,835 × (1 + 11.68%) 3,867,388
4 FCFE4 5,799,262 = 5,305,789 × (1 + 9.30%) 3,804,197
5 FCFE5 6,200,575 = 5,799,262 × (1 + 6.92%) 3,660,538
5 Terminal value (TV5) 157,994,309 = 6,200,575 × (1 + 6.92%) ÷ (11.12% – 6.92%) 93,272,659
Intrinsic value of Automatic Data Processing Inc. common stock 112,201,061
 
Intrinsic value of Automatic Data Processing Inc. common stock (per share) $268.59
Current share price $218.18

Based on: 10-K (reporting date: 2021-06-30).

1 See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

Required Rate of Return (r)

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Assumptions
Rate of return on LT Treasury Composite1 RF 4.85%
Expected rate of return on market portfolio2 E(RM) 13.77%
Systematic risk of Automatic Data Processing Inc. common stock βADP 0.70
 
Required rate of return on Automatic Data Processing Inc. common stock3 rADP 11.12%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

2 See details »

3 rADP = RF + βADP [E(RM) – RF]
= 4.85% + 0.70 [13.77% – 4.85%]
= 11.12%

FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Automatic Data Processing Inc., PRAT model

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Average Jun 30, 2021 Jun 30, 2020 Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016
Selected Financial Data (US$ in thousands)
Dividends 1,583,700 1,523,900 1,338,800 1,120,000 1,008,500 955,700
Net earnings 2,598,500 2,466,500 2,292,800 1,620,800 1,733,400 1,492,500
Revenues 15,005,400 14,589,800 14,175,200 13,325,800 12,379,800 11,667,800
Total assets 48,772,500 39,165,500 41,887,700 37,088,700 37,180,000 43,670,000
Stockholders’ equity 5,670,100 5,752,200 5,399,900 3,459,600 3,977,000 4,481,600
Financial Ratios
Retention rate1 0.39 0.38 0.42 0.31 0.42 0.36
Profit margin2 17.32% 16.91% 16.17% 12.16% 14.00% 12.79%
Asset turnover3 0.31 0.37 0.34 0.36 0.33 0.27
Financial leverage4 8.60 6.81 7.76 10.72 9.35 9.74
Averages
Retention rate 0.38
Profit margin 14.89%
Asset turnover 0.33
Financial leverage 8.83
 
FCFE growth rate (g)5 16.44%

Based on: 10-K (reporting date: 2021-06-30), 10-K (reporting date: 2020-06-30), 10-K (reporting date: 2019-06-30), 10-K (reporting date: 2018-06-30), 10-K (reporting date: 2017-06-30), 10-K (reporting date: 2016-06-30).

2021 Calculations

1 Retention rate = (Net earnings – Dividends) ÷ Net earnings
= (2,598,500 – 1,583,700) ÷ 2,598,500
= 0.39

2 Profit margin = 100 × Net earnings ÷ Revenues
= 100 × 2,598,500 ÷ 15,005,400
= 17.32%

3 Asset turnover = Revenues ÷ Total assets
= 15,005,400 ÷ 48,772,500
= 0.31

4 Financial leverage = Total assets ÷ Stockholders’ equity
= 48,772,500 ÷ 5,670,100
= 8.60

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.38 × 14.89% × 0.33 × 8.83
= 16.44%

FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (91,144,074 × 11.12% – 3,577,000) ÷ (91,144,074 + 3,577,000)
= 6.92%

where:
Equity market value0 = current market value of Automatic Data Processing Inc. common stock (US$ in thousands)
FCFE0 = the last year Automatic Data Processing Inc. free cash flow to equity (US$ in thousands)
r = required rate of return on Automatic Data Processing Inc. common stock

FCFE growth rate (g) forecast

Automatic Data Processing Inc., H-model

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Year Value gt
1 g1 16.44%
2 g2 14.06%
3 g3 11.68%
4 g4 9.30%
5 and thereafter g5 6.92%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5 – g1) × (2 – 1) ÷ (5 – 1)
= 16.44% + (6.92% – 16.44%) × (2 – 1) ÷ (5 – 1)
= 14.06%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 16.44% + (6.92% – 16.44%) × (3 – 1) ÷ (5 – 1)
= 11.68%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 16.44% + (6.92% – 16.44%) × (4 – 1) ÷ (5 – 1)
= 9.30%