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What Underlies Ackman’s Conviction in Automatic Data Processing?

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May. 23 2019, Published 3:18 p.m. ET

Automatic Data Processing

Automatic Data Processing (ADP) is another major holding of Bill Ackman’s Pershing Square Holdings. The fund lost a proxy battle with ADP in 2017. Ackman was asking for three seats on the company’s ten-member board but failed to get any.

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ADP drives Pershing Square’s returns

Pershing Square Holdings maintained in its first-quarter investor letter that ADP’s fiscal 2019 third-quarter earnings results continued to highlight the company’s significant potential for accelerated revenue growth and improved profitability.

During its fiscal 2019 third-quarter results, ADP reported 4% revenue growth and 10% growth in adjusted profit. It also generated better-than-expected employer services operational margins.

After rising 14% in 2018, ADP stock has risen 21% YTD (year-to-date). It has significantly outperformed the S&P 500 Index (SPY) and the NASDAQ Composite Index (QQQ) YTD. ADP buoyed Pershing’s gross returns by 5.5% in 2018, and it’s boosted them by 4.0% YTD.

The average price of ADP for Pershing Square was $105 compared to its current level of $150, implying an increase of 43%.

ADP’s potential

Pershing Square believes that the company has a significant opportunity to accelerate its top line revenue growth and grow its margins. This should, in turn, allow it to compound earnings at a mid- to high-teen growth rate for many years to come.

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