Rational Investing - Cameron Stewart, CFA 对 $ADP 的判断变化

like ADP is an interesting one. I I'll talk to you about payroll in a second. Yeah. In fact, it's it's one that I was thinking about about doing.

ADP, we'll take a look at that one a second.

so ADP is one of those legacy systems that has continued to run payroll and continues to run. It's remarkable how they they've continued to be able to grow earnings. We'll see how they do. I mean, the fear is basically that AI is going to like blow this up and startups are startups are going to eat their lunch.

And I don't know, man, if if if I was if I was I am a CFO, like someone comes to me with a startup um payroll company and I've got a big company, like do I really want how much could I possibly save by going to a small startup versus ADP?

Is it worth the the the risk of messing up employees W2. I mean, I'll just tell you if if you have a company and you miss payroll, people don't the people on the ground don't think, oh, I know someone put a, you know, fat finger key in the payroll file and it didn't upload properly. That's why they get my paycheck. No, no. They think the company's going out of business. They think you bounced the check and should I work for these companies? It is not, oh, oops, haha, little funny glitch. It's, oh my god, I've got a mortgage and a family to feed. These guys just bounced my paycheck. It's It's pretty serious. So, it's not something I would go to the low bidder on. It It's just not.

It's just not something I would go to the low bidder on. It It's just not. And I think that's why you see kind of this relentless march north of this dollar amount and these earnings because it's kind of like what are you saving a few basis points here but you're risking uh hey bud thanks for joining uh you know you're risking a few basis points maybe it cost you a little bit more fine but you have a name brand

I'll tell you a lot of board members a lot of big CEO CFOs they are cowards when it comes to really changing changing a business because it's too much. It's too risky of political capital. They have too much stock. They don't want to get fired for cause because that that removes their bonus plan. If you get fired for cause, um you don't keep your golden parachute. So, the political capital within these big corporations to make big swinging bets that don't fundamentally change earnings is very low. That's why this stuff is sticky. Not necessarily because it's so good, just because it's not worth changing.

Ah. Oh, look at this free cash flow. Just crush it. Oh, look at that. Doubled. They they did something here. Something in 2021. There's a little kink here in revenue that like 14 14 12 15. Then it jumped a billion and a half in one year. It jumped another billion and a half in two years. Another billion. So it so just the growth rate started growing like the slope changed and you can see it it instantly generated more free cash flow.

Let's let's go dig in there. We'll figure out what so that was like 2022. So operating. So what are they doing with this free cash? So debt debt came down uh yeah down. They they paid down a billion dollars in debt. So that's one thing they did with this free cash and and they're buying back stock. They haven't bought back any more stock like with the pattern like free cash flow went up tremendously. they they step up their buying of of um of stock. So, it's got to just be sitting on the balance sheet. They move the dividend up. So, there's a little Yeah, they bump they bump the growth rate of the dividend. So, there's a little bit of slope change here. Um but it's it's probably sitting on the balance sheet.

Let's go check a look. Um we'll do the income statement first. Let's take a look at uh 10 years of data. Let's see what happened. So, right here, there you go. 2% growth rate end of 2021. That went to 10% growth rate in end of 22 and stayed pretty high since then. um gross profit margin 44 45% 4748 49. So there they picked up 300 basis points of profit. That's a big move in um that's a big move at gross profit stage, right? Because it's 3% of a of a of a multi-billion of revenue of of 18 billion is a lot of dollars. Um that's a big move. Okay, so that's they must have changed something in their cost structure.

Actually, they probably did a price increase. Now I think about it. I don't think this has changed much. They probably just raised everyone's rates and and they raised rates faster than C because we had inflation going on in this period of time. They probably just pinged everybody with a with a price increase and that dropped right to the bottom line. I mean, talk about pricing power. Wow.

They had some R&D kick in all of a sudden. Not sure what that was about. Selling SGNA growing. Yeah, it's a price increase. Uh, let's see. Is that stuff sitting on the balance sheet? cash and cash equivalents. Yeah, they went from two billion, they're now four billion. They doubled doubled their cash holding while increasing the dividend. Very nice. Well played. Well played, sir.

Let's take a look at cash flow. I think I did this already on the on the charts, but let's just see if we see anything interesting. depreciation, amortization, stockbased comp. So, they're paying oops, stockbased comp 200. Where did that go? 240 242 million on revenue of 22 billion. 242 divided by call it 22 billion. Okay. I mean, that's 1% 1% of revenue as a kicker to management for for doing what they're doing is an appropriate number. 20% like you see from some of these like Sweet Greens and some of these other companies that are just basically fleecing shareholders to give it to the employees. I I just can't get on board with that. Uh so that's very appropriate. Good job management. You guys earned that one.

net working capital change. They might be switching to more generics. Certainly, sorry, just going back to that vet, someone gave me a comment that they're switching to generics. They could be switching to save money. You're absolutely right. We we kind of brought up the idea of like things falling off of the exclusivity list. Um the idea I guess the thesis being that they should have replacement drugs that do other things that are going to come on uh come on the docket like some sort of weight loss drug that they're going after.

Capex is minimal, right? The systems already involved. So like this thing's a cash printing machine. Um it looks it looks pretty solid to me. What's the cash flow yield? 5%. Great. Nice stock. not not gonna not gonna um you know get a home run on this thing, but uh at least you know it should continue to churn over long term and hopefully it it regains and it compounds over you know 10, 15, 20 years.