Here's What Likely Drew Bill Ackman To Invest In ADP

Bill Ackman has been criticized as “foolish, inappropriate [and] irresponsible” for his 8-percent stake in and board nominations for Automatic Data Processing ADP.

Some doubt Pershing Square Capital Management’s capacity to achieve its expressed goals of “accelerating growth, improving the quality of ADP’s software and service offerings, dramatically reducing operating costs and increasing efficiency.”

And in some respects, BMO Capital Markets analyst Jeffrey Silber agrees.

Related Link: Activists Gonna Activate: Hedge Funds Send Letters To Acorda, Taubman Centers Boards

By his estimates, growth acceleration may prove difficult as the firm’s revenue already grows at or above the industry rates, even outpacing that of rival Paychex, Inc. PAYX. Silber sees potential in acquisitions, divestitures and a shift toward cloud-based services, but not in improvements to the core business.

At the same time, he sees limits in building on ADP’s near-record stock values and high ratings for products and services.

What Can Ackman Do?

Pershing Square may see more success in its goals to reduce operational costs and increase efficiency.

Ackman said ADP’s margins could expand by more than 50 percent, and while Paychex’s 2,000-basis-point lead indicates potential, Silber said ADP could be limited by the its business model, including its target customer and methods of recording professional employer organization pass-through costs.

“There does appear to be some opportunity for margin expansion, though we caution investors not to expect ADP to ever reach the margin levels that PAYX generates,” Silber wrote in a Tuesday note.

If Ackman successfully improves margins, BMO Capital predicts a $132 value on the stock. The firm currently has a Market Perform rating on the stock with a $105 price target.

At the time of publication, ADP was trading at $109.78.

_______

Image Credit: By Dimples915 - Own work, CC BY-SA 3.0, via Wikimedia Commons