BR or ADP: Which Outsourcing Industry Stock is Better Placed?

The Outsourcing industry has been benefiting from increasing demand for expertise in improving efficiency and cost reduction initiatives over the past several years. Revenues and income of most of the industry participants remain stable, enabling them to pay out stable dividends.

However, coronavirus has dealt a huge blow to the global outsourcing industry in recent time as lockdowns prompted firms to "reshore" jobs. Meanwhile, operational challenges related to working from home such as availability of laptops, Internet connectivity and data-security issues continue. Notably, wider application of artificial intelligence (AI) is expected to be the biggest change due to the pandemic. Adoption of AI should lower complications and simplify operations.

Given this backdrop, it is not a bad idea to undertake a comparative analysis of two Consulting Services stocks — Broadridge Financial Solutions, Inc. BR and Automatic Data Processing, Inc. ADP. Both the stocks are part of the broader Zacks Business Services sector (one of the 16 Zacks sectors). While market capitalization of Broadridge is $14.54 billion, that of Automatic Data Processing is $68.82 billion.

As both the stocks carry a Zacks Rank #3 (Hold), we are using certain other parameters to give investors a better insight. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price Performance

Broadridge clearly scores over ADP in terms of price performance. So far this year, shares of Broadridge have gained 2.5% against decline of 6.1% for ADP and 7.4% for the industry. The Zacks S&P 500 composite has declined 1.1% in the said time frame.

 

Earnings Expectations

Earnings growth and stock price gains often serve as indications of a company’s prospects.

Broadridge’s current-quarter earnings are projected to grow 20.9% while that of ADP are expected to decline 14.9%.  Looking at the full-year 2020 picture, Broadridge’s earnings are projected to grow 6.4% while that of ADP are expected to increase 5.5%.

For 2021, Broadridge’s earnings are expected to register 6.9% growth while that of ADP are expected to decline 1.1%.

Thus, Broadridge has an edge over ADP in terms of quarterly and yearly projected earnings growth.

 Earnings Surprise History

Earnings surprise history helps investors to get an idea of the company’s performance in the previous quarters.

ADP has performed better than Broadridge, having surpassed the Zacks Consensus Estimate in three of the previous four quarters, delivering average four-quarter beat of 1.6%. Broadridge has delivered negative surprises in three of the prior four quarters, delivering average negative surprise of 9.9%.

Earnings Estimate Revisions

The direction of estimate revisions serves as an important pointer when it comes to the price of a stock.

Over the past 60 days, the Zacks Consensus Estimate for Broadridge’s current-quarter earnings has risen 1% versus a decrease of 26.5% for ADP. For full-year 2020, Broadridge’s earnings estimates have decreased 0.9% compared with a decrease of 4.9% for ADP.

The Zacks Consensus Estimate for full-year 2021 earnings has decreased 3.3% for Broadridge compared with a decrease of 14.6% for ADP.

Based on quarterly and yearly earnings estimate revisions in the past 60 days, Broadridge is better placed than ADP.

Valuation

The price to earnings ratio (P/E) metric is used to measure a company's value relative to its earnings. In general, a lower number or multiple is considered better than a higher one.

The trailing 12-month price-to-earnings (P/E - TTM) multiple for Broadridge and ADP is 27.5 and 27, respectively, while that of the industry is 24.1. Although both the companies compare unfavorably with the industry, ADP has an edge with a lower P/E - TTM value.

Net Margin

Net profit margin helps investors evaluate a company’s business model in terms of pricing policy, cost structure and operating efficiency, and shows how good it is at converting revenues into profits. Hence, a strong net profit margin is preferred by all classes of investors.

With a TTM net margin of 17.1%, ADP not only compares favorably with the industry’s figure of 11.4% but also has a lead over Broadridge’s 9.5% TTM net margin.

Bottom Line

Our comparative analysis shows that Broadridge scores over ADP in terms of price performance, earnings estimate revisions, and quarterly and yearly earnings growth projection. However, ADP enjoys an advantage in terms of earnings surprise history and net margin.

A faster share price rally year to date has led to a rich valuation for Broadridge compared with ADP.

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Automatic Data Processing, Inc. (ADP) : Free Stock Analysis Report
 
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