Automatic Data Processing, Inc. (ADP) in Roseland, N.J., and Workday, Inc. (WDAY) in Pleasanton, Calif., are two prominent companies that offer cloud-based human resource management (HRM) solutions worldwide. ADP is a global provider of business outsourcing solutions that offer a wide range of human resources, payroll, tax, and benefits administration solutions. It also provides solutions to auto, truck, motorcycle, marine, and recreational vehicle dealers. WDAY, in comparison, develops enterprise cloud applications that help customers manage critical business functions and optimize their financial and human resources for the finance, healthcare, manufacturing, education, and technology industries worldwide.
The demand for cloud-based human resources, finance, and other critical business operation-related services has increased significantly since the onset of the pandemic. The continuing digitization of businesses globally should further drive the demand for analytics-based human resource management solutions. Indeed, the global human resource management market is expected to grow at a 12.2% CAGR to $43.29 billion by 2028. So, both ADP and WDAY should benefit.
But while WDA’s shares have gained 10.9% in price over the past nine months, ADP has surged 20.9%. In terms of past year’s performance, ADP is again the clear winner with 36% gains versus WDAY’s 12.4% returns. But which of these stocks is a better pick now? Let’s find out.
In an announcement in late September, ADP introduced diversity, equity, and inclusion (DEI) benchmarks to its award-winning people analytics solution, ADP DataCloud. The new benchmarks replace outdated, inaccurate survey data with ‘live’ HR and compensation data from ADP’s vast workforce dataset. With ADP’s new diversity benchmarking data, users can examine trends across industries, geographies, organization sizes, and worker demographics and help companies make decisions accordingly. ADP also got recognized as the ‘Top HR Product’ of the year recently.
Also in September, WDAY agreed to acquire Zimit, a cloud-based configure price quote (CPQ) solution built for enterprise services industries. With Zimit, WDAY will provide organizations with a comprehensive quote-to-cash process automation offering and increase visibility across the entire revenue cycle. Such automation of complex finance processes should enable WDAY to gain widespread recognition across the industry.
Recent Financial Results
ADP’s total revenues for its fiscal fourth quarter, ended June 30, 2021, increased 10.7% year-over-year to $3.74 billion. The company’s adjusted EBIT came in at $678.20 million, up 3.9% from the prior-year period. While its adjusted net earnings increased 3.9% year-over-year to $512.40 billion, its non-GAAP EPS increased 5.3% to $1.20. The company had $3.44 billion in cash and cash equivalents as of July 31, 2021.
For its fiscal second quarter, ended July 31, 2021, WDAY’s total revenues increased 18.7% year-over-year to $1.26 billion. The company’s non-GAAP operating income was $291.80 million for the quarter, up 13.2% from the prior-year period. While its non-GAAP net income increased 51.5% year-over-year to $319.78 million, its non-GAAP EPS increased 46.4% to $1.23. As of July 31, 2021, the company had $1.09 billion in cash and cash equivalents.
Past and Expected Financial Performance
ADP’s revenue and total assets have grown at CAGRs of 4.2% and 7.9%, respectively, over the past three years. The company’s levered free cash flow has grown at a 3% CAGR over the past three years.
Analysts expect ADP’s EPS to increase 10.1% year-over-year in the current year and next year. Its revenue is expected to increase 6.8% year-over-year in the current year and 6.3% next year. Analysts expect the stock’s EPS to grow at a 10.5% rate per annum over the next five years.
In comparison, WDAY’s revenue and total assets have grown at CAGRs of 24.4% and 24.1%, respectively, over the past three years. The company’s levered free cash flow has grown at a 36.5% CAGR over the past three years.
Analysts expect WDAY’s EPS to increase 24.9% year-over-year in the current year and decline 2.7% next year. Its revenue is expected to grow 18.2% in the current year and 19.3% next year. The stock’s EPS is expected to grow at a 15.6% rate per annum over the next five years.
In terms of forward EV/Sales, WDAY is currently trading at 12.20x, which is 122.2% higher than ADP’s 5.49x. In terms of non-GAAP forward PEG, WDAY’s 2.44x compares with ADP’s 2.41x.
ADP’s trailing-12-month revenue is almost 3.2 times higher than WDAY’s. However, WDAY is more profitable, with a 72.5% gross profit margin versus ADP’s 45.1%.
Also, WDAY’s 31.7% levered free cash flow margin compares with ADP’s 24.2%.
While ADP has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, WDAY has an overall B grade, equating to Buy. The POWR Ratings are calculated buy considering 118 different factors, each weighted to an optimal degree.
Both WDAY and ADP have B grades for Quality, which is consistent with their higher-than-industry profitability ratios. WDAY’s 31.7% trailing-12-month levered free cash flow margin is 155.1% higher than the 12.4% industry average. ADP’s 24.2% trailing-12-month levered free cash flow margin is 94.6% higher than the 12.4% industry average.
WDAY has an A grade for Growth, which is consistent with its impressive year-over-year earnings growth. WDAY’s operating cash flow has increased 53.5% from the prior-year period. However, ADP’s C grade for Growth is in sync with its 2.2% year-over-year operating cash flow growth. Of the 47 stocks in the B-rated Outsourcing – Business Services industry, ADP is ranked #25. WDAY is ranked #26 of 158 stocks in the Software – Application industry.
Beyond what we’ve stated above, our POWR Ratings system has also rated WDAY and ADP for Value, Momentum, Stability, and Sentiment.
The growing adoption of HRM solutions by organizations in this remote-working era should benefit both ADP and WDAY. However, we think its higher profitability makes WDAY a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Outsourcing – Business Services industry, and here for those in the Software – Application industry.
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ADP shares were trading at $203.94 per share on Tuesday morning, up $0.19 (+0.09%). Year-to-date, ADP has gained 17.42%, versus a 17.44% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...
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