The group's valuation has fallen back to its historic valuation floor of 20x earnings, last reached twice over the 2011-2013 period - a time of extreme economic stress - and then again in early 2020, at the height of the pandemic.
It is naturally tempting to bet on a rebound, not least given Automatic Data Processing's overwhelming dominance of its market, even though it is true that this dominance is being tested by several smaller rivals such as Paychex or Paycom, Intuit or, outside the listed universe, Gusto, Rippling and Deel.
One can of course fear that AI - again - could undermine Automatic Data Processing's bread and butter. One can also reasonably suggest that, on the contrary, it will broaden it, for example by reducing the group's operating expenses, thereby supporting a fresh margin expansion.
The price of dominance is a growth rate that is markedly more modest than that of all its aforementioned challengers. Over the past decade, revenue has only just doubled. Operating profit, however, has grown at a faster pace, as margins have expanded.
Automatic Data Processing has also reduced its number of shares outstanding by 11% over the past decade, while tripling its dividend distributions; the result is earnings per share that are also growing at a faster pace than the group's consolidated profit.
Traditionally shy on acquisitions, Automatic Data Processing - which remains remarkably well-capitalised, yet still delivers a truly stratospheric return on equity - acquired WorkForce Software for $1.2bn in October 2024.
Valuation multiples around this transaction were not disclosed, but they likely hovered around 5x revenue and 20x to 25x the target's EBITDA.
These days, Automatic Data Processing is valued at 4x its revenue, and at less than 13x its expected EBITDA this year.
