Automatic Data Acquires Cobalt - Analyst Blog - Automatic Data Processing (NASDAQ:ADP)

Provider of outsourced HR solutions and payroll processing services Automatic Data Processing Inc. (ADP) announced the closing of its previously announced acquisition of privately held Cobalt Group for approximately $400 million in cash. Automatic Data had announced the acquisition of Cobalt on July 9, 2010.

Cobalt is a premier provider of digital marketing solutions to automotive manufacturers and dealers in North America and is headquartered in Seattle, Washington.

Management expects the acquisition to be slightly accretive to earnings in the first year, while boosting earnings in successive years.

The bulk of Automatic Data’s revenues come from its high growth Employer Services and Dealer Services segments. The acquisition of Cobalt will support Dealer Services' global applications strategy.

In the most recent quarter (fourth quarter of 2010), Dealer Services revenues were flat (down 1% organically) compared with the year-ago quarter, mainly due to an increased market share and strong competitive win rates, partially offset by the cumulative impact of dealership closings, along with lower international software license fee revenues.

The company projects Dealer Services revenues and pre-tax margin to be flat to slightly up in 2011. Over the long term, we expect the Dealer Services business to benefit from increased market share and expansion into international markets.

The acquisition of Cobalt will also be beneficial for the company in winning new customers in the automotive industry while expanding its auto dealer offering. Moreover, Automatic Data pointed out that the acquisition will complement its core business and enable it to strengthen its existing relationship with automobile manufacturers.

Fourth Quarter Results

Automatic Data’s results for the fourth quarter of 2010 were in line with the Zacks Consensus Estimate. Adjusted net earnings from continuing operations for the quarter were 42 cents per share, in line with the Zacks Consensus Estimate.

Earnings per share were down 3 cents from 45 cents reported in the year-ago quarter, due to an increased unemployment level and the negative impact of the economic downturn. Earnings per share were negatively affected by a higher effective tax rate in the quarter and increased operating expenses.

However, revenues of $2.19 billion were slightly above the Zacks Consensus Estimate of $2.14 billion as the quarter benefited from an improved demand in Employer Services and PEO Services due to new business sales growth in the quarter.

Estimate Revision

Management provided a cautious outlook on the overall economic condition and does not expect any major change in the current economic environment. Increased investment and higher expenses related to higher sales and service, which started during the second half of 2010, are expected to pressure the company’s earnings growth in 2011.

In the last 30 days, fourteen of 21 analysts covering the stock made a downward estimate revision for the first quarter of 2011. For the full year 2011, twenty-one analysts revised their estimates downward. There were no upward revisions in the same period.

The Zacks Consensus Estimate for the first quarter and full year 2011 is 53 cents (down 3 cents in last 30 days) and $2.42 (down 10 cents in last 30 days), respectively.

Currently, Automatic Data is a short-term Zacks #4 Rank ('Hold') stock due to downward estimate revisions. Automatic Data faces increased competition from other outsourcing firms such as Paychex Inc. (PAYX), Ceridian, Intuit Inc. (INTU), Administaff Inc. (ASF) and Ultimate Software Group Inc. (ULTI).

However, we remain optimistic on Automatic Data’s high recurring revenues, strong execution, impressive free cash flow, increased acquisition and international expansion. We will be more positive on the stock when it exhibits incremental revenues and earnings growth. Until then we maintain our long-term Neutral recommendation on the stock.