Important disclosures appear on the last page of this report.

The Henry Fund

Tippie College of Business

Juhi Narang [juhi-narang@uiowa.edu]

Automatic Data Processing Inc (ADP) April 14, 2017

Information Technology – Business Software and Services Stock Rating Buy

Investment Thesis Target Price $120 - $130 Automatic Data Processing Inc (ADP), established itself as the leader in Payroll, HR Management Software and Human Capital Management Services. We forecast a CAGR 6.3% growth in revenue during the forecast horizon (2017-2021). This strong revenue growth expectation coupled with estimated 24% upside for the stock are the drivers for the buy recommendation for the stock. Drivers of Thesis • ADP is one of the biggest player in the human capital management market and has many advantages due to its scale and reach. The Human Capital Management industry is expected to grow at CAGR of 4.5%.(22) • EBIT margin widened considerably in FY16, and expanded by 230 basis points in second quarter for FY 2017. We forecast gross margin to increase to 42% from current 41%. • ADP has a strong balance sheet, steady cash inflow and recurring revenue stream as it enters contracts with clients for a period of 2-7 years. It has very less debt so it can utilize the money to develop new software and enhanced Human Capital Management tools

Risk to Thesis • ADP is greatly exposed to the overall health of the labor market. If employment rate goes down, revenue will go down. • Health care policy changes significantly impacting health insurance provided by employers to employees may impact ADP’s PEO business’s clients and prospects, affecting the sales. •Adoption of new data privacy and protection policies may result in significant costs to ADP to amend certain of its business practices. • Any adverse macro-economic development resulting in disproportionate interest rate movements along the yield curve can result in the compression on net interest margin, thereby impacting the interest income earned by ADP

Henry Fund DCF $125.72 Henry Fund DDM $122.32 Relative Multiple $86.74 Price Data Current Price $101.45 52wk Range $ 84.36 - 105.20 Consensus 1yr Target $101.27 Key Statistics Market Cap (B) $45.73 Shares Outstanding (M) 44 Institutional Ownership 100% Five Year Beta 0.8 Dividend Yield 2.28% Est. 5yr Growth (EPS) 12% Price/Earnings (TTM) 27.4 Price/Earnings (FY1) 27.6 Price/Sales (TTM) 3.79 Price/Sales (FY 1) 3.6 Profitability Operating Margin 12.80% Profit Margin 41.4% Return on Assets (TTM) 3.40% Return on Equity (TTM) 33.30%

Earnings Estimates Year 2015 2016 2017E 2018E 2019E 2020E

EPS $3.11 $3.28 $3.68 $4.15 $4.65 $5.20 growth -1.3% 5.2% 12.3% 12.9% 12% 12%

12 Month Performance Company Description

Automatic Data Processing, Inc. is a global provider of business outsourcing solutions. The company's services include a wide range of human resource, benefits administration solutions, payroll and tax. It is one of the largest payroll processors in the world, serving about 625,000 clients. The company provides services in more than 100 countries spread across the Americas, Europe, the Middle East, Africa, and the Asia Pacific region.

27.4

33.3

28.1 27.6

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ADP Industry

Source: Yahoo Finance and HF Estimates

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ADP S&P 500

Source: Yahoo Finance

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EXECUTIVE SUMMARY

Founded in 1949, Automatic Data Processing (ADP) has emerged as the largest global provider of payroll outsourcing services in terms of revenue. In September 2014, the company spun off its dealer services unit. Today, it serves more than 650,000 clients and no single client or group of affiliated clients accounted for revenues more than 2% of ADP’s annual consolidated revenues in 2016.

After a detailed study of the end market demand drivers, the 5 Year CAGR for revenue was estimated to be 6.3% during the forecast horizon (2017-2021). This estimated top line revenue growth coupled with ADP’s efforts to increase same revenue from existing clients to increase the margin are the major drivers of the DCF model used to compute the intrinsic value of ADP’s stock. The model suggests a 24% upside on the current stock price (as of April 14th, 2017), which is the driver for the “Buy” recommendation for ADP.

COMPANY DESCRIPTION

Automatic Data Processing (ADP) is the largest global provider of payroll outsourcing services. Two major segments identified are Employer services (payroll processing, tax and benefits administration services) and PEO (professional employer organization) services. Other offerings include accounting, auto collision estimates for insurers, employment background checks, desktop support, and business development training services. The company in 2014 spun off its former dealer services segment.

Source: 10-k

The chart explains that 71% of the total revenue in FY 2016 was contributed by Employer Services segment which provides HR Business Process Outsourcing and technology-enabled Human Capital Management (HCM). Professional employer organization(PEO) services that provides HR management services via TotalSource, contributes to 26% of overall revenue and a small portion of 3% is contributed by interest that ADP has earned on funds held for clients.

Major Segments:

Employer Services

The employer services segment (71%) segment offers a comprehensive range of HR Business Process Outsourcing and technology-enabled HCM solutions. ADP serves approximately 530,000 clients via its strategic software as a service (“SaaS”) offerings, commonly referred to as “the cloud.”(1) These services include payroll services, benefit administration, talent management, HR management, Time and Attendance Management, Insurance Services, Retirement Services and Tax and Compliance Services. The mobile applications enable businesses to process their payroll, and enable more than 8.1 million employees around the world to access their information.

The clients range from single employee small businesses to large businesses with multinational operations.

Source: 10-K

The chart explains that only 18% of clients in US are ones who have more than 1000 employees (large clients), 9% have 50 to 999 employees (medium-sized) and 72% have 1-49 employees (small-sized). Client retention is estimated at approximately 11 years in Employer Services.

71%3%

26%

2016 Revenue Decomposition

Employer Services

Interest on funds held for clients

PEO revenues

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Revenues increased by 4% in 2016 primarily due to new business bookings from new business started during the past twelve months. Revenue increase also contributed by impact of price increases, and an increase in the number of employees on clients’ payrolls. In 2016, Employer Services' overall margin increased from 30.5% to 31.1%. We assume this to remain the same.

As per the revenue guidance provided by ADP in January 2017 for fiscal year 2017, management expects revenue for Employer Services to grow by 3-4% YoY. Due to weaker bookings trajectory, management lowered expected growth rate from 4-5%. Uncertainty about changes in the ACA and Department of Labor's Overtime Rule can reduce the demand as clients wait to gain further clarity on the impact these changes will have on their business. We expect margin expansion in Employer Services of 25 to 50 basis points and a 2.5% growth in pays per control. We have modelled this revenue growth for calculation of intrinsic value of share.

PEO (professional employer organization) Services

As a PEO, ADP TotalSource provides complete HR management services to the clients. ADP TotalSource combines key HR management and employee benefits functions, including HR administration, employee benefits, and employer liability management, into a single-source solution.

PEO Services' revenues increased 16% in fiscal 2016, as compared to fiscal 2015 due to a 13% increase in the average number of worksite employees. This was driven by an increase in the number of new PEO Services clients and growth in the existing clients. Client retention is estimated at approximately 7 years in PEO Services. This segment has also observed higher client participation and higher benefit pass-through costs in PEO benefit offerings.

As per the revenue guidance for fiscal year 2017, management expects revenue for PEO Services to grow by 13 % YoY. Initially management had issued revenue guidance of 14-16 % for FY17. The guidance was lowered due to lower booking trajectory.

ADP now expects PEO Services segment margin expansion of at least 100 basis points. Earlier margin forecast was of about 75 basis points. This has been included in our valuation model.

Interest on Funds held for clients

Client funds are invested in accordance with ADP’s prudent and conservative investment guidelines to ensure the safety, liquidity and diversification of ADP clients’ funds.

In fiscal 2016, interest on funds held for clients of $377.3 million. We observed a Y-o-Y decrease of 0.11 % in the consolidated interest earned on funds held for clients due to the decrease in average interest rates 2016 partially offset by 2.8% increase in the average client funds balances in 2016.

Assuming an increase in the Fed Funds rate in FY 2017, ADP expects interest on funds held for clients to increase by $15 million, compared to the prior forecast of $5 to $10 million, or 2% to 3%. This is based on anticipated growth in average client funds balances of approximately 3% from $22.4 billion in fiscal 2016.

Geographic Distribution:

The company provides services in more than 100 countries spread across the Americas, Europe, the Middle East, Africa, and the Asia Pacific region. Almost 85% of revenue comes from United States.

Source: 10-k

Most of ADP’s revenues come from the U.S. The company is trying to diversify geographically. It had acquired a majority interest in a leading Chinese provider of HR outsourcing services and trying to reach other emerging markets too.

85%

9%

2% 4%

Geographic Distribution

United States Europe Canada Other

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Pays per Control

Pays per control is a metric that indicates the average number of employees ADP serves for a client, ranging from small to large businesses. One of the reasons, for the revenue growth of ADP is increase in the pays per control Y-o-Y. A very small incremental investment required to add a new customer or an employee to an existing platform and this savings in installation costs have resulted in high incremental returns and margins. As the number of employees increase, ADP’s margins increase because employers pay a flat service fee initially for system installation and then pay additional fees for every employee added to their system.

Same-client employees

Source: 10-K

The chart explains that the pays per control has been increasing Y-o-Y and is estimated to grow at 2.5% for 2017.

Cost Structure

Source: 10-K

The chart explains all the cost structure of ADP and major expenses as a percentage of total expenses. Major expenses incurred by ADP are:

•Operating Expenses include the costs directly attributable to servicing clients such as employee salaries, costs for employee benefits coverage, workers' compensation coverage, state unemployment taxes for worksite employees. Forecasted to remain 52% of revenue as for FY 2016.

•Selling, general and administrative expenses include implementation expenses to support growth in new business bookings as well as costs to serve existing client base to support revenue growth. We have seen increase in severance expenses for workforce optimization. Forecasted to remain 23% of revenue as for FY 2016.

•Systems development and programming costs are costs to develop, support, and maintain ADP’s products. These include expenses for activities such as client migrations to new strategic platforms, purchases of new software and software licenses. Forecasted to remain 5% of revenue as for FY 2016.

Technological Development

The business model of ADP mainly focusses on providing Human Capital Management solutions to the clients. To serve the unique needs of diverse types of businesses, ADP provides a range of solutions, via a software and service-based delivery model, which businesses of all sizes can use to recruit, staff, pay, manage, and retain employees. It provides solutions that enable the clients to outsource the HR, time and attendance management, payroll, and benefits administration functions to ADP. So, it has to keep developing new tools and technology to improve efficiency and retain the clients.

In 2016, ADP spent 5.2% of revenue on system development and programming and we estimate that it will be the same for the forecasted period (2017-2021). The focus on product innovation and the high demand for additional HCM solutions is driving sales for ADP.

Key Risks

•Employment rate: ADP is greatly exposed to the overall health of the labor market. If employment rate goes down, revenue will go down. So, it is in the favor of ADP that the unemployment rate is falling. The Henry Fund team believes that the unemployment will settle at 4.6% in the next 6 months and 4.75% in the next 24 months. This positive outlook for employment has been incorporated into the model.

2.80%

3%

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2.20%

2.40%

2.60%

2.80%

3.00%

3.20%

2014 2015 2016 2017 E

Growth in Pays per Control (Y-o-Y %)

59%

26%

7%

6%

2%

1%

0% 10% 20% 30% 40% 50% 60% 70%

Operating expenses

Selling, general & admin

Income taxes

Systems develop & program

Depreciation & amortization

Interest expense

Cost Structure as % of overall expenses

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•Regulatory changes: The performance also depends on potential regulatory changes to the Affordable Care Act. Health care policy changes can have significant impact on health insurance provided by employers to employees and on the health insurance market for the small and mid-sized businesses that ultimately will impact ADP’s PEO business’ clients and prospects affecting the sales.

•Data Privacy: ADP is exposed to risks related to data privacy and protecting these data from security breaches or technology disruption as the company increasingly handles more employee data on cloud systems. The European Union adopted a comprehensive general data privacy regulation (the “GDPR”) in May 2016. Data Privacy policies imposed by the GDPR may require ADP to amend certain of our business practices.

•Technological advancements: As discussed, Human Capital Management and payroll processing industry is subject to rapid technological advances. To meet client demands, ADP must upgrade and enhance existing solutions and services. Failure to keep up with the technological advancements with competitors can adversely affect the demand and revenues of the company.

•Currency Fluctuation: A sizeable portion of the revenues (almost 15%) is earned outside the United States. This has exposed ADP to fluctuations in foreign currency exchange rates that could impact the results of operations, financial position and cash flows.

Key merits

•Companies often do not risk substituting their payroll service provider out of fear it could result in errors that could result in fines due to complex reporting requirements and compliances. Also, many of ADP’s clients are small and mid-sized businesses that may not have an HR department.

•ADP has a strong balance sheet, steady cash inflow and recurring revenue stream as it enters contracts with clients for a period of 2-7 years. It is making many acquisitions and has many potentially accretive acquisitions.

•There are good prospects of revenue growth in this industry. Overall industry is expected to grow at CAGR of 4.5% (22). Companies are readily adopting HCM solutions faster.

RECENT DEVELOPMENTS

On February 1, 2017, ADP announced its second quarter earnings for fiscal year 2017. A few highlights were:

EPS

For second quarter of FY 2017, ADP has declared strong results. It reported earnings that beat market consensus by $0.06 (14) at $0.87.

Revenue

Revenue for second quarter went up by 6% to $3 billion

even though there was a decline of 5% in new business

bookings. When compared to a strong second quarter of

2016, the benefits of strong prior period bookings in new

business were clearly evident in this quarter. The

company saw decline in revenue from mid- and large-

clients during second quarter due to uncertainty around

the US presidential election and potential regulatory

changes related to Affordable Care Act (ACA). In addition

to the continued benefits resulting from strong prior

period bookings, strengthening in the retention metric

helped the firm in driving organic revenue growth across

all the revenue segments.

Small business bookings remained strong. Net bookings fell 5% YoY in the quarter. Pipelines remain solid, but ADP is seeing a longer selling cycle. Management expects a return to bookings growth in second half of 2017.

Future Estimate

The management has revised its revenue growth guidance due to lower bookings. It expects revenue for Employer Services to grow by 3-4 % YoY. Initially the management had issued revenue guidance of 4-5 % for FY17 and then lowered it, because of the weaker bookings graph. Revenue for PEO Services is expected to grow by 13 % YoY. Initially the management had issued revenue growth guidance of 14-16 % for FY17. Our estimates are well within the market consensus estimates.

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Source: Bloomberg

Source: Bloomberg

Revenue Analysis

Source: 10-K and HF estimates

The chart above shows the expected trend of revenue for next three forecasted years as part of our valuation model (2017-2019) . It depicts that the Employer services and PEO will continue to grow and expected to drive total revenue higher by CAGR 6.3%.

Acquisitions and Divesture Strategy

The Marcus Buckingham Company

In January 2017, ADP acquired The Marcus Buckingham Company (TMBC), an innovator in human capital management (HCM), for total cash consideration of around USD 70 million. This is to provide ADP clients with a more scientific approach to employee engagement and performance. This US company’s technology and renowned research adds to the existing talent portfolio and puts ADP in the list of innovative organizations who are thinking differently about how they manage and engage their talent. TMBC's cloud-based performance and talent management solution, StandOut, couples applications with coaching and education to give team leaders the tools, insights and data needed to turn talent into better employee performance. This is ADP’s strategy to strengthen and differentiate itself. This is a relatively smaller acquisition, so we have not included any impact in our valuation model.

COBRA and CHSA business

The company has divested businesses when the price is right.

In fiscal 2017, the company sold off its Consumer Health Spending Account ("CHSA") and Consolidated Omnibus Reconciliation Act ("COBRA") businesses for $235 million to WageWorks booking a gain of nearly $200 million. WageWorks and ADP have also formed a partnership. ADP sales representatives will offer WageWorks’ full suite of products and services to their extensive client base and future customers.

Client Retention

Average client retention is 11 years, and this helps ADP to raise prices with little resistance. Retention improved despite ADP keeping pace on mid-market migrations to the Workforce Now platform. The service realignment initiative should improve client service levels over time as well.

Year

Consensus Estimates -

Revenue

Henry Fund Revenue

estimates

2017E 12,374.5 12,495.8

2018E 13,232.6 13,423.5

2019E 14,223.1 14,466.3

2020E 16,090.0 15,642.1

2021E 17,368.0 16,972.0

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Revenue - Market analysts estimates vs. HF estimates

Consensus Estimates - Revenue

Henry Fund Revenue estimates

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Int on fundsheld forclients

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EBIT Margin

In fiscal year 2016, EBIT margin widened considerably from 18.9% to 19.2%.(1) While in second quarter FY 2017, it widened 230 basis points due to strong investments in both ACA (Affordable Care Act ) and HCM sales.

Management maintained adjusted EBIT margin guidance for 50bp of expansion and FY17 adjusted EPS growth of 11-13% YoY.

Dividends

ADP pays out significant amount of its earnings to shareholders. Historically, ADP has maintained a dividend payout ratio in the range of 55% to 65%. ADP is a steady dividend payer that has raised its dividend every year for the last 40 years. We have assumed the payout ratio to remain constant at average rate of 62% for our valuation model. In April 2017, ADP declared $0.57/share quarterly dividend in line with previous years. Current yield is supposed to be 2.21%.

Share Repurchases

As ADP’s stock has climbed in value, the company has accelerated repurchases. In fiscal 2016, the company reduced its share count by more than 3.5% and it continues to repurchase additional shares and this is captured in the model. ADP is expected to spend over 6 billion in stock repurchases during the forecast horizon.

INDUSTRY TRENDS

Tax Complexities and Affordable Care Act

The increasing tax complexities and regulation varying across geographies is currently working in the favor of ADP and other payroll service providers. The complexity of the ACA and its reporting requirements has created additional revenue opportunities for payroll service providers strengthen ADP’s grip on their customer base.

Cloud Competitors

There have been growing concerns about new competition arising from cloud competitors. This is because people believe that a software-as-a-solution, or SaaS, platform addresses all of the human resource needs of businesses and will disrupt payroll processing industry’s existing model. This proves to be a threat but

ADP has been using cloud service solutions for many years. Even though companies start using their own software, they will still require customer care and human intervention to understand and solve the complexities of payroll, taxes, and benefits administration. This means that ADP will still have revenue sources and has a sustainable business model.

Source : Statista

As per the chart, we can see how SaaS revenue in HCM has gained momentum from 2010 to 2015 in various functions. The growth is outstanding in Performance management and E-recruiting areas.

Products /Services segmentation - Industry

Source: IBIS World

As from the chart above, we can derive that the Human Capital Management industry is majorly dominated by the full-service payroll services (58%). The second major function is billing services (15%) followed by other small functions. We expect sales in all other areas like tax

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planning and billing services to grow in coming years. As the industry grows, we see a great potential for ADP to expand and grow in these areas and identify the revenue generation segments.

Client segmentation in market

Source: IBIS World

This chart shows the size of the markets that buy the industry’s products or use its services. It is based on the proportion of revenue each buying segment contributes to total industry revenue.

Market segmentation chart suggests that 47.5% of revenue of human capital management services comes from other private businesses which is a pool of smaller industries. These small businesses lack resources and funds to invest in their internal Human Capital Management systems. This is a big segment that ADP can target to increase revenue and grow. Almost 17% comes from Technology-producing companies and other smaller percentages from different companies. We expect the composition to remain the same in coming years.

MARKETS AND COMPETITION

Payroll service industry is a highly competitive market and has high market penetration. But the barriers to entry for this industry are high as well since payroll outsourcing requires huge capital investment. The company needs to have sizeable infrastructure and skilled employees in substantial number. Economies of scale is another factor of big market players like ADP and Paychex which give them the competitive advantage. Problem can arise if there remains lack of differentiation between products and services these companies provide.

So if BPOs start providing HCM services to clients, they could potentially pull away business as they already have infrastructure and capital. All they need is to partner with an entrepreneur or a small payroll processing organization.

Major Companies:

Source: IBIS World

The chart suggests that ADP has 17% of the market share in the HR & payroll software industry in terms of revenue. Major players in the Human Capital Management industry that compete with ADP are Insperity Inc, PayChex Inc., Intuit, Trinet Group, WageWorks, Workday and others.

Paychex specializes in servicing smaller businesses with fewer than 25 employees but ADP focus on midsized businesses with approximately 50 employees. When ADP loses a customer, it is usually at different ends of the size spectrum. Recently, ADP has seen customer losses to Ultimate Software and Workday which specialize in servicing companies with more than 1,000 employees.

ADP achieves its best margins somewhere between 25 and 100 employees. Here customer attrition is low and these customers often do not have fully developed HR and accounting departments. When ADP loses a customer in this segment of the market, it is typically due to a client going out of business.

Price

More than 72% of ADP’s clients are small sized (1-49 employees). In this segment, payroll processors compete on the prices that they offer. Paychex is ADP’s biggest competitor in this segment. There is also a pressure from new entrants who try to capture the market by attractive price offerings like company named Gusto. Below is an example of how closely these companies compete.

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Source: Fitsmallbusiness.com

Profitability ratios

Source:Factset

ADP does not have attractive gross and net margins when compared to its peers Paychex and Intuit. We expect margins to improve. Our valuation model is extremely sensitive to the operational costs. A small increase in 1% in Selling, General and administration expenses can change our decision to HOLD.

Price / Earnings ratio

The chart below represents the Forward P/E ratios of ADP’s peers. We see that ADP has the highest P/E ratio in comparison to its peers. But due to different revenue segments and earnings composition, it is difficult to make a head to head comparison of all these peer companies. When we compare, them using relative P/E method, we assume that market values peer stocks accurately. And ignore other qualitative factors impacting these prices. Also, many technology companies tend to have higher

P/E multiples. So, we cannot arrive at value of stock to provide a realistic comparison.

Source: Factset and HF estimates

ADP’s Competitive Positioning:

ADP is very well placed and ranked in the market leaders. It has strong profitability majorly due to reasons like high customer switching costs, economies of scale and their brand image. ADP is able to enter into long term contracts with its clients because it is very difficult to switch outsourced human resources processes to another provider. Average client retention is 10 years.

ADP can be price competitive because of company’s economies of scale and have no margin pressure as it can leverage its large 650,000-member client base to spread out costs associated with its servicing infrastructure. The company has created a very strong brand image for reliability and accuracy. So, clients trust ADP when it comes to critical HR functions.

Acquisitions:

Acquisition is a common strategy to grow and be a market leader in the payroll service industry. Big companies have been acquiring smaller companies to expand their offerings. ADP has made several acquisitions in past and including Probusiness.

0% 20% 40% 60% 80% 100%

Insperity

PayChex

TriNet

Intuit

ADP

Profitability Ratios

Net Margin Gross Margin ROE ROA

21

27

21

27 28

18

25

18

2324

0

5

10

15

20

25

30

Insperity,Inc.

Pay Chex,Inc

TriNetGroup Inc

Intuit AutomaticData

Processing(ADP)

Forward P/E Comparisons

P/E 17 P/E 18

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Source: CrunchBase.com

ECONOMIC OUTLOOK

We have a positive fundamental outlook for the data processing and outsourced services. In companies in this industry have had good growth and posted healthy earnings in last few years and we expect it to continue in future.

There is a strong correlation between growth of this industry and global employment growth. So, it is extremely necessary to forecast the US employment rate. It is also important to track the GDP growth forecasts for US as it forms the biggest market for ADP’s products. With over 85% of ADP’s revenue coming from United States, it is important to track the foreign currency rate for USD. Ultimately the revenue earned from interest on funds held for clients is highly dependent on Fed Fund rates, we should forecast and estimate the rise in interest rates for coming years.

Unemployment rate

Source: IBIS world

Revenue from payroll processing services has an inverse relationship with the unemployment rates. So, lower unemployment rates are better for ADP. Human Capital Management’s business benefits significantly from increased employment. Increase in an employee on employer’s payroll, increases ADP’s revenue.

Source: www.tradingeconomics.com

The unemployment rate in the US has continued to decline. Current unemployment rate is 4.7% in Feb 2017 (18) and the Henry Fund team believes that unemployment will reach 4.5% over next 6 months. This rising employment rates indicate positive impacts on ADP’s revenue.

FED Interest rates

Federal Reserve Bank raised FED Funds rate in March 2017 and left the door open for further rates hikes. We forecast the fed funds rate will reach 1.7% over the 2 years’ horizon, while we estimate it to remain stable at 1% over the next six months. The increase will lead to increased borrowing costs which means that ADP will earn higher interest income on the funds held for clients The table below depicts interest rate trends.

Source: Macrotrends.net

Period Acuired by Company acquired Industry

Jan'17 ADP The Marcus Buckingham Companyleadership development solutions

Jan'03 ADP Probusiness  payroll and human resources services

Oct'11 ADP Wallace Retraining Tax Credit service provider

Sep'11 ADP Asparity Decision Solutions Employee Benefits Management Decision

Mar'11 ADP AdvancedMD Saas, Cloud Computing

Aug'10 ADP Workscape Web-based HR and benefits applications

Dec'15 Paychex Advance Partners back office solutions to temporary staffing firm

Dec'12 Paychex ExpenseWire expense management solution

May'11 Paychex ePlan Services retirement planning solutions

Dec'10 Paychex SurePayroll nline payroll services

April'16 TriNet Teleborder Recruiting and Enterprise Software

Feb'14 TriNet Cost Cooperative Internet Services

May'12 TriNet ExpenseCloud Saas, Human Resource Management

Mar'09 TriNet Gevity HR Human Resource Management

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ADP’s Balance sheet represent funds held for clients which are assets that are used to satisfy the obligations to remit funds relating to the Company’s payroll and payroll tax filing services. These funds have been invested in short-term and long-term marketable securities. As markets increases the interest rates in response to increase in Fed Funds rate, ADP earns a higher interest on these invested securities. In FY 2016, ADP earned $ 377 million as interest on invested funds.

GDP Growth

Source: Tradingeconomics.com

Going forward, the US GDP will grow and is expected to remain stable at around 3% (2017-2019) and this should translate to a steady demand for payroll processing and Human Capital Management services. We expect this growth in the light of new rules and policies coming up which are pro-business.

ADP’s business will be positively impacted by the GDP growth and expected to grow the business.

Strengthening Dollar

Stronger dollar is likely to put downward pressure on US exports. 15% of ADP’s revenue is dependent on revenue contributions from international sales. This has exposed ADP to fluctuations in foreign currency exchange rates that could impact the results of operations, financial position and cash flows. In 2016, ADP incurred $ 25 million loss due to currency translation adjustments.

With new pro-business policies coming up, Henry Fund team forecasts that US Dollar will continue to strengthen in coming 2 years and likely to have a negative impact revenues earned outside USA. Usually firms in this

industry hedge against currency foreign currency receivables to minimize the risk of currency fluctuations.

Source: Tradingeconomics.com

INVESTMENT POSITIVES

• ADP has seen healthy gains for Employer Services and Professional Employer Organization (PEO) Services. ADP has successfully aligned its HCM service model and cloud focused strategy. The company has continued to perform better even after losing client revenue from recent CHSA and COBRA business sale

• ADP is one of the biggest player in the human capital management market and has many advantages due to its scale and reach

• EBIT margin widened considerably in FY16, and expanded by 230 basis points in second quarter for FY 2017.

• ADP’s client retention is approximately 11 years in Employer Services, and approximately 7 years in PEO Services, and has remained constant.

• Throughout its existence, ADP has benefited from fluctuating levels of labor regulation and benefit compliance. For e.g. whether the Affordable Care Act is maintained or repealed, most midsize businesses will need

• The strength of PEO business illustrates some of the strengths ADP possesses in cross-selling enabled by the company’s large existing client base

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INVESTMENT NEGATIVES

• The industry is largely saturated for large company employer solutions. There is a lot of competition from established players which have long relationships and agreements with the clients. • New start-us and emerging participants provide low priced and customized services to small and mid-sized companies.

• There is a lot of uncertainty around the Affordable Care Act and Department of Labor's Overtime Rule could continue to decrease demand, as clients wait to gain further clarity what will be the effects on their business.

• ADP is highly impacted by changes in laws and regulations applicable to the businesses such as the data privacy laws. Company incurs huge costs to implement changes. Failure to comply could adversely affect financial condition and reputation.

• ADP is highly dependent on technological advancements and must invest huge money in systems development. Failure to adapt to new technology and services to meet client needs can diminish the sales and impact the business.

VALUATION

ADP follows a 52-week fiscal year ending in June. DCF-EP, DDM, and relative P/E analysis have been used to value ADP. The three approaches presented a price of $119, $100 and $105 respectively. We believe that the intrinsic value of ADP’s stock is closest to the DCF-EP model as the DCF model accounts for the residual income available to all equity holders.

Source: HF estimates

We believe the stock value is most closely captured by the DCF valuation as it most closely captures the revenue decomposition and growth forecasts of the different lines of business. Hence, we have given a BUY rating to the stock. The stock currently trades for around $102 and thus we estimate a high upside of 16% We also used relative P/E valuation technique which presented a price of $100. We compared ADP to different Human Capital Management companies such as Insperity Inc., PayChex, TriNet, Intuit and a few others. We understand that the closest comparison to ADP is Paychex, Insperity and Trinet as all compete to provide HR solutions to the clients. But there are differences in the business models and size of the clients. Due to different revenue segments and earnings composition, it is difficult to make a head to head comparison of these peer companies.

Also, relative P/E valuation method assumes that market values peer stocks accurately. But these technology companies tend to have higher P/E multiples. This is because in the case of tech companies, the assumption is a growing stream of future income which increases the present value (share price) even though the present earnings are low.

Source:

In FY 2016, ADP declared and paid $2.1 as dividend. We have assumed the 2016 payout ratio to continue in the foreseeable future and have assumed a payout ratio of 62%. No importance has been attached to the stock price derived from the DDM model due to the theoretical limitations of the DDM model not accounting for the

102

119

100

105

90

95

100

105

110

115

120

125

Current Stockprice

DCF - EP Relative P/E DDM

Share Price (USD)

21

27

21

27

41

29

18

25

18

23

35

26

-

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

P/E Trends - Relative Valuation

P/E 17 P/E 18

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complete residual income attributable to the equity holders of a firm. The shortcomings of Relative P/E valuation method and DDM, leads us to believe that DCF valuation captures the stock value most accurately.

Short-Term Revenue Growth Assumptions

Revenue from employer services is the biggest source of income for ADP as it has earned 70% of total revenue in 2016. This revenue is expected to grow in next 5 years as the pays per control continues to increase. As per the guidance provided by ADP, we have assumed that the revenue from employer services will grow by 3.7% for next five years, PEO revenue will grow by almost 13% for next 5 years and interest on funds held for clients will increase by 1% assuming the increase in FED rates.

All these segments ensure sustainable revenue growth for ADP but we also need to consider the increased growth in other costs which grow in proportion with revenue such as cost of revenue - 59%, selling, general and admin - 23% of sales. Other expenses like depreciation are expected to be CAGR rate of 20% of beginning assets. Amortization expense is taken as per the schedule provided in the 10-K.

Gross profit / Operating profit margins

Historical data shows that Gross profit margin for ADP has been between 40 to 41% and net operating margin between 12 to 13%. By 2021, we expect a gross margin to be 42% and net margin to be 14% which we include in our valuation model.

Capital Expenditure

Based on historical average of amount spent on Property, Plant and equipment, we expect gross tangible assets to grow at CAGR rate of 5% every year. In case of intangibles, the historic growth has been due to development of technology and patents in the past. We assume that ADP makes no big acquisition in next five years and hence, intangibles grow at a low rate of CAGR 5.6% for patents relating to new technological developments.

Debt

ADP’s 10-K mentions that it will repay 1 billion debt in next 5 years. We assume that ADP will re-finance itself by taking 1 billion loan in future.

Share Repurchase

ADP has announced a plan to repurchase $1.2 billion to $1.4 billion of share every year which we expect to happen consistently a period of 5 years. This has also been observed historically. This change is leading to change in the free cash flows and increase in EPS for 5 forecasted periods.

Other assumptions

Continuing value growth of EPS is assumed to be in line with estimated GDP growth i.e. estimated 3%. (21)

Risk-free rate is taken as 3,08%, which is the 30-yr. treasury yield rate. Ultimately, we believe that the Equity Risk Premium is 4.8% which adequately captures the risk associated with the market over and above the risk-free rate.

Valuation Summary

The DCF model presents a stock price of $125, with a 4.8% equity risk premium. The various sensitivity analyses performed have been conducted that reveal the target price for ADP share to be between $120 - $130. The model presents 16% upside potential over current market price which is driving the BUY recommendation for the stock.

KEYS TO MONITOR

One of the most important keys to monitor is the competitive landscape of ADP. As the industry requires very less capital to enter the market, we must be vigilant for new entrants in the market. As technology advances, more small business owners may opt for a do-it-yourself SaaS solution.

Looking at the current situation, for the model, we did not increase the growth rate of competition and it has been already built in top line revenue growth due to the increased competition. But any greater than anticipated decline in revenues will be a red flag.

The performance and growth of the company is highly correlated to the unemployment rate in USA. As unemployment rates start increasing, So it is extremely important to track the unemployment rate and decreasing employment rate would raise an alarm.

Page 14

REFERENCES

1. ADP 10-K

2. https://finance.yahoo.com

3. S & P Capital IQ

4. Bank of America – Merrill Lynch

5. Morningstar

6. NelsonHall https://research.nelson-hall.com/blogs/?avpage-views=blog&type=post&post_id=646

7. Sramana Mitra http://www.sramanamitra.com/2010/08/10/payroll-sector-acquisitions-and-management-changes/

8. Media Center http://mediacenter.adp.com/releasedetail.cfm?releaseid=1008137

9. Street Insider https://www.streetinsider.com/Conference+Calls/WageWorks+%28WAGE%29+to+Acquire+ADPs+%28ADP%29+CHSA%2C+COBRA+Businesses/12193923.html

10. Ryan Downie http://www.investopedia.com/articles/professionals/042416/adp-who-are-adps-main-competitors.asp

11. Software advice http://www.softwareadvice.com/hr/adp-alternatives/

12. Wiki Invest http://www.wikinvest.com/stock/Automatic_Data_Processing_(ADP)/Competition

13. Morning Star http://financials.morningstar.com/competitors/industry-peer.action?t=ADP

14. Seeking Alpha https://seekingalpha.com/article/3761366-adps-cloud-competition-cash-cows-looming

15. D&B Hoovers

http://www.hoovers.com/company-information/cs/competition.automatic_data_processing_inc.98c05a1da41e8abb.html

16. NASDAQ http://www.nasdaq.com/symbol/adp/competitors

17. BBC News http://www.bbc.com/news/business-39530875

18. Trading Economics http://www.tradingeconomics.com/united-states/unemployment-rate

19. The Fed https://www.federalreserve.gov/

20. Trading Economics http://www.tradingeconomics.com/united-states/gdp-growth

21. World Bank http://www.worldbank.org/en/publication/global-economic-prospects

22. Statista https://www-statista-com.proxy.lib.uiowa.edu/statistics/572722/share-of-enterprise-applications-market-worldwide-by-functional-market/

23. FitsmallBusiness.com http://fitsmallbusiness.com/adp-vs-paychex-vs-gusto/

24. Factset

25. Bloomberg

IMPORTANT DISCLAIMER

Henry Fund reports are created by student enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa’s Tippie School of Management. These reports are intended to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and

Page 15

communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.

Ticker Symbol ADPCurrent Share Price $101.45Current Model Date 42825Fiscal Year End June. 30

Pre-Tax Cost of Debt 4%Beta 80%Risk-Free Rate 3%Equity Risk Premium 5%CV Growth of NOPLAT 3%CV Growth of EPS 3.00%Operating cash assumption 0.02Marginal Tax Rate 0.30 WACC 6.66%Total Shares outstanding 455.7DCF Share price 125.76$ DDM Price 122.32$ Upside potential 0.24$ Credit Rating AA-

Automatic Data Processing (ADP)Key Assumptions of Valuation Model

0Sensitivity Analysis

125.76 0.4 0.5 0.6 0.7 0.8 1.15 1.35 1.55 1.75 1.95 2.154.40% 272.14 218.18 182.15 156.38 137.04 95.82 81.85 71.50 63.51 57.17 52.014.50% 266.15 213.38 178.14 152.94 134.03 93.72 80.07 69.94 62.14 55.94 50.894.60% 260.42 208.78 174.31 149.65 131.15 91.72 78.36 68.46 60.82 54.76 49.834.70% 254.93 204.39 170.64 146.51 128.40 89.80 76.73 67.04 59.56 53.63 48.804.80% 249.67 200.17 167.12 143.49 125.76 87.96 75.16 65.67 58.36 52.55 47.82

Equity Risk 4.90% 244.62 196.12 163.74 140.59 123.22 86.20 73.66 64.37 57.20 51.51 46.88Premium 5.00% 239.78 192.24 160.50 137.82 120.79 84.51 72.22 63.11 56.09 50.52 45.98

5.10% 235.12 188.51 157.39 135.14 118.45 82.88 70.84 61.91 55.03 49.56 45.125.20% 230.64 184.92 154.40 132.58 116.21 81.32 69.51 60.75 54.00 48.64 44.285.30% 226.33 181.47 151.52 130.11 114.04 79.81 68.22 59.63 53.01 47.76 43.485.40% 222.18 178.14 148.74 127.73 111.96 78.36 66.99 58.56 52.06 46.91 42.715.50% 218.18 174.93 146.07 125.43 109.95 76.97 65.80 57.53 51.15 46.09 41.97

125.76 54.63% 55.63% 56.63% 57.63% 58.63% 59.63% 60.63% 61.63% 62.63% 63.63% 64.63%2.00% 102.93 102.93 102.93 102.93 102.93 102.93 102.93 102.93 102.93 102.93 102.932.25% 107.67 107.67 107.67 107.67 107.67 107.67 107.67 107.67 107.67 107.67 107.672.50% 112.97 112.97 112.97 112.97 112.97 112.97 112.97 112.97 112.97 112.97 112.972.75% 118.96 118.96 118.96 118.96 118.96 118.96 118.96 118.96 118.96 118.96 118.963.00% 125.76 125.76 125.76 125.76 125.76 125.76 125.76 125.76 125.76 125.76 125.76

CV NOPLAT 3.25% 133.55 133.55 133.55 133.55 133.55 133.55 133.55 133.55 133.55 133.55 133.55Growth 3.50% 142.58 142.58 142.58 142.58 142.58 142.58 142.58 142.58 142.58 142.58 142.58

3.75% 153.16 153.16 153.16 153.16 153.16 153.16 153.16 153.16 153.16 153.16 153.164.00% 165.73 165.73 165.73 165.73 165.73 165.73 165.73 165.73 165.73 165.73 165.734.25% 180.90 180.90 180.90 180.90 180.90 180.90 180.90 180.90 180.90 180.90 180.904.50% 199.59 199.59 199.59 199.59 199.59 199.59 199.59 199.59 199.59 199.59 199.594.75% 223.18 223.18 223.18 223.18 223.18 223.18 223.18 223.18 223.18 223.18 223.18

0.9%

125.76 0.4 0.5 0.6 0.7 0.8 1.15 1.35 1.55 1.75 1.95 2.1515.16% 250.02 200.43 167.32 143.65 125.89 88.03 75.21 65.71 58.38 52.56 47.8316.16% 249.92 200.35 167.26 143.60 125.85 88.01 75.19 65.69 58.37 52.55 47.8217.16% 249.83 200.29 167.21 143.56 125.81 87.99 75.18 65.68 58.36 52.55 47.8218.16% 249.76 200.24 167.17 143.53 125.79 87.97 75.17 65.68 58.36 52.55 47.8219.16% 249.71 200.20 167.14 143.50 125.77 87.97 75.17 65.67 58.36 52.55 47.8220.16% 249.67 200.17 167.12 143.49 125.76 87.96 75.16 65.67 58.36 52.55 47.8221.16% 249.65 200.15 167.11 143.48 125.75 87.96 75.17 65.68 58.36 52.55 47.8322.16% 249.63 200.14 167.10 143.48 125.75 87.96 75.17 65.68 58.37 52.56 47.8323.16% 249.63 200.15 167.11 143.48 125.75 87.97 75.18 65.69 58.37 52.56 47.8424.16% 249.65 200.16 167.11 143.49 125.76 87.98 75.18 65.70 58.38 52.57 47.8525.16% 249.67 200.17 167.13 143.51 125.78 87.99 75.20 65.71 58.39 52.58 47.8626.16% 249.69 200.20 167.15 143.53 125.80 88.01 75.21 65.72 58.41 52.60 47.87

Beta

Beta

Cost of revenue/ revenue for 2016

Depreciation for PP&E/

Begin NPPE

125.76 11% 14% 17% 20% 30% 33% 36% 39% 42% 45% 48%0.50% 490.48 474.38 458.26 442.12 389.20 372.95 356.67 340.37 324.04 307.68 291.301.00% 345.08 333.81 322.52 311.21 274.15 262.77 251.37 239.96 228.52 217.07 205.601.50% 266.43 257.76 249.09 240.40 211.92 203.18 194.42 185.65 176.86 168.06 159.242.00% 217.14 210.11 203.07 196.03 172.93 165.84 158.73 151.62 144.49 137.35 130.202.50% 183.36 177.45 171.54 165.62 146.21 140.25 134.28 128.30 122.31 116.31 110.303.00% 158.77 153.68 148.58 143.48 126.76 121.62 116.48 111.32 106.16 100.99 95.823.50% 140.06 135.60 131.12 126.64 111.96 107.45 102.94 98.41 93.88 89.35 84.804.00% 125.36 121.38 117.40 113.41 100.33 96.32 92.30 88.27 84.23 80.19 76.144.50% 113.50 109.91 106.33 102.73 90.95 87.34 83.71 80.08 76.45 72.81 69.165.00% 103.73 100.47 97.21 93.94 83.23 79.94 76.64 73.34 70.04 66.72 63.415.50% 95.54 92.56 89.57 86.57 76.75 73.74 70.72 67.69 64.66 61.63 58.596.00% 88.58 85.83 83.07 80.31 71.25 68.47 65.68 62.89 60.10 57.30 54.506.50% 82.60 80.04 77.48 74.92 66.52 63.94 61.35 58.77 56.17 53.58 50.97

125.76 0.73% 1.23% 1.73% 2.23% 2.73% 3.73% 4.23% 4.73% 5.23% 5.73% 6.23%17.6% 161.94 161.39 160.84 160.30 159.77 158.73 158.22 157.71 157.21 156.72 156.24 18.6% 155.14 154.62 154.11 153.61 153.11 152.13 151.66 151.18 150.71 150.25 149.80 19.6% 148.34 147.86 147.38 146.91 146.45 145.54 145.09 144.65 144.21 143.78 143.36 20.6% 141.55 141.10 140.66 140.22 139.79 138.95 138.53 138.12 137.71 137.31 136.92 21.6% 134.75 134.34 133.93 133.53 133.13 132.35 131.97 131.59 131.21 130.84 130.48 22.6% 127.95 127.57 127.20 126.83 126.47 125.76 125.40 125.06 124.71 124.37 124.04 23.6% 121.15 120.81 120.47 120.14 119.81 119.16 118.84 118.53 118.21 117.90 117.60 24.6% 114.35 114.05 113.75 113.45 113.15 112.57 112.28 112.00 111.71 111.43 111.16 25.6% 107.56 107.29 107.02 106.75 106.49 105.97 105.72 105.46 105.21 104.96 104.72 26.6% 100.76 100.52 100.29 100.06 99.83 99.38 99.15 98.93 98.71 98.50 98.28 27.6% 93.96 93.76 93.56 93.37 93.17 92.78 92.59 92.40 92.21 92.03 91.84 28.6% 87.16 87.00 86.84 86.67 86.51 86.19 86.03 85.87 85.71 85.56 85.40 29.6% 80.37 80.24 80.11 79.98 79.85 79.59 79.47 79.34 79.21 79.09 78.96

125.76 3.17% 3.67% 4.17% 4.67% 5.17% 5.67% 6.17% 6.67% 7.17% 7.67% 8.17%0.50% 141.32 137.99 134.65 131.32 127.98 124.65 121.31 117.98 114.64 111.31 107.97 0.75% 140.93 137.60 134.27 130.94 127.61 124.28 120.95 117.62 114.30 110.97 107.64 1.00% 140.53 137.21 133.89 130.56 127.24 123.92 120.60 117.27 113.95 110.63 107.30 1.25% 140.13 136.82 133.50 130.19 126.87 123.55 120.24 116.92 113.60 110.29 106.97 1.50% 139.74 136.43 133.12 129.81 126.50 123.19 119.88 116.57 113.26 109.95 106.64 1.75% 139.34 136.04 132.73 129.43 126.13 122.82 119.52 116.22 112.91 109.61 106.31 2.00% 138.95 135.65 132.35 129.05 125.76 122.46 119.16 115.86 112.57 109.27 105.97 2.25% 138.55 135.26 131.97 128.68 125.39 122.09 118.80 115.51 112.22 108.93 105.64 2.50% 138.15 134.87 131.58 128.30 125.01 121.73 118.44 115.16 111.88 108.59 105.31 2.75% 137.76 134.48 131.20 127.92 124.64 121.36 118.09 114.81 111.53 108.25 104.97 3.00% 137.36 134.09 130.82 127.54 124.27 121.00 117.73 114.46 111.18 107.91 104.64 3.25% 136.96 133.70 130.43 127.17 123.90 120.64 117.37 114.10 110.84 107.57 104.31 3.50% 136.57 133.31 130.05 126.79 123.53 120.27 117.01 113.75 110.49 107.23 103.97

Systems development & programming costs

Normal Cash %

Tax Rate

Risk Free Rate

Pre-Tax Cost of Debt

SG&A Expense/Rev

enue

Automatic Data Processing (ADP)Revenue Decomposition

Fiscal Years Ending June. 30 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

Segmental breakdownRevenues 9575.2 7928.3 8234 8538.7 8854.6 9182.2 9521.9 9874.3 % Change Y-Y 7.2% -17.2% 3.9% 3.7% 3.7% 3.7% 3.7% 3.7%Interest on funds held for clients 373.7 377.7 377.3 381.1 384.9 388.7 392.6 396.5 % Change Y-Y -11.2% 1.1% -0.1% 1.0% 1.0% 1.0% 1.0% 1.0%PEO revenues 2257.6 2632.5 3056.5 3576.1 4184.0 4895.3 5727.5 6701.2 % Change Y-Y 15.1% 16.6% 16.1% 17.0% 17.0% 17.0% 17.0% 17.0%Total revenues 12206.5 10938.5 11667.8 12495.8 13423.5 14466.3 15642.1 16972.0 % Change Y-Y 7.9% -10.4% 6.7% 7.1% 7.4% 7.8% 8.1% 8.5%

Revenues 78.4% 72.5% 70.6% 68.3% 66.0% 63.5% 60.9% 58.2%Interest on funds held for clients 3.1% 3.5% 3.2% 3.0% 2.9% 2.7% 2.5% 2.3%PEO revenues 18.5% 24.1% 26.2% 28.6% 31.2% 33.8% 36.6% 39.5%Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Geographic distribution United States 81.7% 83.2% 84.6% 85.0% 85.3% 85.6% 85.9% 86.2% Europe 11.1% 9.9% 9.1% 9.5% 9.5% 9.5% 9.5% 9.5% Canada 3.3% 2.9% 2.4% 2.4% 2.3% 2.2% 2.1% 2.0% Other 4.0% 3.9% 3.9% 3.7% 2.9% 2.7% 2.5% 2.3%Total 100.0% 100.0% 100.0% 100.7% 100.0% 100.0% 100.0% 100.0%

Automatic Data Processing (ADP)Income Statement

Fiscal Years Ending June. 30 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

Revenues 9575.2 7928.3 8234 8,538.7 8,854.6 9,182.2 9,521.9 9,874.3

Interest on funds held for clients 373.7 377.7 377.3 381.1 384.9 388.7 392.6 396.5

PEO revenues 2257.6 2632.5 3056.5 3,576.1 4,184.0 4,895.3 5,727.5 6,701.2

Total revenues 12206.5 10938.5 11667.8 12,495.8 13,423.5 14,466.3 15,642.1 16,972.0

Operating expenses 6248.6 5625.3 6025 6,452.6 6,931.6 7,470.1 8,077.2 8,764.0 Systems development & programming costs 718 595.4 603.7 646.5 694.5 748.5 809.3 878.1 Depreciation & amortization 254.8 206.9 211.6 291.6 242.0 198.2 166.8 146.2 Total costs of revenues 7221.4 6427.6 6840.3 7,390.7 7,868.2 8,416.8 9,053.4 9,788.4 Selling, general & administrative expenses 2762.4 2496.9 2637 2,824.1 3,033.8 3,269.5 3,535.2 3,835.8 Separation costs 14.9 0 0 0 0 0 0 0Goodwill impairment 0 0 0 0 0 0 0 0Interest expense 6.1 6.5 56.2 74.9 72.7 70.4 68.2 68.2 Total expenses 10004.8 8931 9533.5 10,289.7 10,974.7 11,756.7 12,656.8 13,692.3 Interest income on corporate funds 56.2 56.9 62.4 81.8 75.4 54.7 43.2 31.0 Other income, net 16.7 6.3 38 40.7 43.7 47.1 50.9 55.3 Earnings (loss) from continuing operations before income taxes2274.6 2070.7 2234.7 2,328.6 2,568.0 2,811.4 3,079.5 3,365.9 Provision (benefit) for income taxes 772 694.2 741.3 693.9 765.3 837.8 917.7 1,003.1

Net earnings from continuing operations 1502.6 1376.5 1493.4 1,634.7 1,802.7 1,973.6 2,161.8 2,362.9

Net earnings (loss) from discontinued operations 13.3 76 -0.9 - - - - - Net earnings (loss) 1515.9 1452.5 1492.5 1,634.7 1,802.7 1,973.6 2,161.8 2,362.9

Year end shares outstanding 480.2 466.4 455.7 444.6 434.2 424.5 415.5 407.2 EPS (recurring) 3.16 3.11 3.28 3.68 4.15 4.65 5.20 5.80 Dividends per share 1.88 1.95 2.08 2.19 2.48 2.77 3.10 3.46 Dividend payout ratio 60% 63% 64% 60% 60% 60% 60% 60%

Automatic Data Processing (ADP)Balance Sheet

Fiscal Years Ending June. 30 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

Cash & cash equivalents 1,983.6 1,639.3 3,191.1 2,393.4 1,903.7 1,424.4 1,036.6 693.5

Short-term marketable securities 2,032.2 26.6 23.5 23.7 24.0 24.2 24.5 24.7

Accounts receivable, net 1,800.4 1,546.9 1,742.8 1,866.5 2,005.0 2,160.8 2,336.4 2,535.1 Other current assets 759.2 731.1 701.8 751.6 807.4 870.1 940.8 1,020.8 Funds held for clients 19,258.0 24,865.3 33,841.2 34,653.4 35,485.1 36,336.7 37,208.8 38,101.8 Total current assets 25,833.4 28,809.2 39,500.4 39,688.6 40,225.2 40,816.2 41,547.1 42,375.9 Long-term marketable securities 54.1 28.9 7.8 8.0 8.2 8.4 8.6 8.8 Long-term receivables, net 155.4 32.2 27.1 29.0 31.2 33.6 36.3 39.4 Gross Property, plant & equipment 1,776.4 1,840.8 1,907.5 1,976.7 2,048.3 2,122.6 2,199.6 Acc Deprection (1,103.7) (1,155.8) (1,293.9) (1,417.6) (1,530.3) (1,634.7) (1,733.1) Property, plant & equipment, net 777.4 672.7 685.0 613.7 559.1 518.1 487.9 466.5 Other assets 1,485.3 1,270.8 1,233.5 1,321.0 1,419.1 1,529.3 1,653.7 1,794.3 Goodwill 3,113.8 1,793.5 1,682.0 1,682.0 1,682.0 1,682.0 1,682.0 1,682.0 Gross Intangibles 2,483.1 2,623.1 2,771.0 2,927.2 3,092.3 3,266.6 3,450.8 Amortization (1,979.9) (2,088.9) (2,242.4) (2,360.7) (2,446.2) (2,508.6) (2,556.5) Intangible assets, net 632.3 503.2 534.2 528.6 566.5 646.1 758.0 894.3 Total assets 32,051.7 33,110.5 43,670.0 43,870.9 44,491.3 45,233.7 46,173.6 47,261.2 Accounts payable 169.7 194.5 152.3 163.1 175.2 188.8 204.2 221.5

Accrued expenses & other current liabilities 1,314.9 1,159.2 1,246.8 1,335.3 1,434.4 1,545.8 1,671.5 1,813.6

Accrued payroll & payroll-related expenses 707.1 627.3 616.7 660.5 709.5 764.6 826.8 897.1

Dividends payable 226.9 226.4 238.4 - - - - -

Short-term deferred revenues 332.6 228.6 233.2 249.7 268.3 289.1 312.6 339.2 Income taxes payable 20.4 27.2 28.2 - - - - - Other Liabilities 2,173.0 - - - - - - - Client funds obligations 18,963.4 24,650.5 33,331.8 34,131.8 34,950.9 35,789.7 36,648.7 37,528.3 Total current liabilities 23,908.0 27,113.7 35,847.4 36,540.4 37,538.3 38,578.2 39,663.8 40,799.7 Long-term debt 11.5 9.2 2,007.7 1,949.5 1,888.6 1,827.6 1,827.6 1,827.6 Other liabilities 660.0 644.3 701.1 750.9 806.6 869.3 939.9 1,019.8 Deferred income taxes 288.8 172.1 251.1 235.1 259.2 283.8 310.8 339.8 Long-term deferred revenues 513.2 362.7 381.1 408.1 438.4 472.5 510.9 554.3 Total liabilities 25,381.5 28,302.0 39,188.4 39,883.9 40,931.2 42,031.3 43,253.0 44,541.2 Common stock 63.9 63.9 63.9 63.9 63.9 63.9 63.9 63.9 Capital in excess of par value 545.2 663.3 768.1 813.3 858.5 903.7 948.9 994.2 Retained earnings 13,632.9 13,460.3 14,003.3 14,663.4 15,391.4 16,188.4 17,061.4 18,015.6 Treasury stock-at cost (7,750.0) (9,118.4) (10,138.6) (11,338.6) (12,538.6) (13,738.6) (14,938.6) (16,138.6) Accumulated other comprehensive income (loss) 178.2 (260.6) (215.1) (215.1) (215.1) (215.1) (215.1) (215.1) Total stockholders' equity 6,670.2 4,808.5 4,481.6 3,986.9 3,560.1 3,202.3 2,920.5 2,720.0

Automatic Data Processing (ADP)Value Driver Estimation

Fiscal Years Ending June. 30 2014 2015 2016 2017E 2018E 2019E 2020E 2021EMarginal tax rate CalculationFederal Statutory rate 35% 35% 35% 35% 35% 35% 35% 35%State income taxes, net of federal tax benefit 2.1% 1.7% 1.8% 2% 2% 2% 2% 2%Foreign rate differential -1.4% -8.6% -7.0% -7% -7% -7% -7% -7%Marginal Tax Rate 36% 28% 30% 30% 30% 30% 30% 30%

EBITASales 12,207 10,939 11,668 12,496 13,424 14,466 15,642 16,972 Total costs of revenues (7,221) (6,428) (6,840) (7,391) (7,868) (8,417) (9,053) (9,788) Selling, general & administrative exp (2,762) (2,497) (2,637) (2,824) (3,034) (3,269) (3,535) (3,836) +Implied Int on operating leases (PV) 19 11 16 16 17 17 18 19 EBITA 2,242 2,025 2,207 2,297 2,538 2,797 3,072 3,367

Pre tax Income 2,275 2,071 2,235 2,329 2,568 2,811 3,079 3,366 Provision 772 694 741 694 765 838 918 1,003

Less Adjusted Income Taxes Provision for Income Taxes 772 694 741 694 765 838 918 1,003 -Tax Gain on Interest income on corporate bonds (20) (16) (19) (24) (22) (16) (13) (9) - Tax Gain on other income (6) (2) (11) (12) (13) (14) (15) (16) +Tax shield on Operating Lease interest 7 3 5 5 5 5 5 6 Total Adjusted Taxes 753 679 716 662 735 813 895 983

Add Changes in deferred taxes Changes in deferred taxes 54 (117) 79 (16) 24 25 27 29

NOPLAT : EBITA - Adjusted Taxes +Change in DT NOPLAT 1,543 1,229 1,570 1,619 1,828 2,009 2,204 2,413

Fiscal Years Ending June. 30 2014 2015 2016 2017E 2018E 2019E 2020E 2021E Calculation of Invested Capital Operating Current AssetsCash 1,984 1,639 3,191 2,393 1,904 1,424 1,037 694

Cash as percentage of revenue 2% 2% 2% 2% 2% 2% 2% 2%Normal Cash 244 219 233 250 268 289 313 339 Accounts Receivable 1,800 1,547 1,743 1,866 2,005 2,161 2,336 2,535 Funds held for clients 19,258 24,865 33,841 34,653 35,485 36,337 37,209 38,102 Other current assets 759 731 702 752 807 870 941 1,021 Current operating Assets 22,062 27,362 36,519 37,521 38,566 39,657 40,799 41,997 Accounts payable 170 195 152 163 175 189 204 222 Accrued expenses & other current liabilities 1,315 1,159 1,247 1,335 1,434 1,546 1,671 1,814 Accrued payroll & payroll-related expenses 707 627 617 660 709 765 827 897 Dividends payable 227 226 238 - - - - - Short-term deferred revenues 333 229 233 250 268 289 313 339 Income taxes payable 20 27 28 - - - - - Client funds obligations 18,963 24,651 33,332 34,132 34,951 35,790 36,649 37,528 Current Operating Liabilities 21,735 27,114 35,847 36,540 37,538 38,578 39,664 40,800 Net Operating Working Capital 327 248 672 981 1,028 1,079 1,135 1,197

Plus: Net Property , Plant and Equipment 777 673 685 614 559 518 488 467 Intangible Assets 632 503 534 529 567 646 758 894 Capitalized PV of Operating Leases 515 291 435 450 467 484 501 519 Long-term receivables, net 155 32 27 29 31 34 36 39 Other Assets 1,485 1,271 1,234 1,321 1,419 1,529 1,654 1,794 Plus Other opertating assets, net of depreciation 2,788 2,098 2,230 2,329 2,484 2,693 2,949 3,247

Other Long term Liabilities 660 644 701 751 807 869 940 1,020 Long-term deferred revenues 513 363 381 408 438 473 511 554 Less: Other operating liabilities 1,173 1,007 1,082 1,159 1,245 1,342 1,451 1,574 invested Capital 2,719 2,012 2,504 2,765 2,825 2,948 3,122 3,337 Return on Invested CapitalNOPLAT 1,543 1,229 1,570 1,619 1,828 2,009 2,204 2,413 Beginning Invested Capital 489 2,719 2,012 2,504 2,765 2,825 2,948 3,122

ROIC 315.77% 45.19% 78.02% 64.65% 66.11% 71.12% 74.75% 77.29%Economic Profit: Begin IC * ( ROIC -WACC)Beginning Invested Capital 489 2,719 2,012 2,504 2,765 2,825 2,948 3,122

ROIC 316% 45% 78% 65% 66% 71% 75% 77%WACC 6.66% 6.66% 6.66% 6.66% 6.66% 6.66% 6.66% 6.66%

Economic Profit 1,511 1,048 1,436 1,452 1,644 1,821 2,007 2,205 FCF: NOPLAT+Change in Invested CapitalNOPLAT 1,543 1,229 1,570 1,619 1,828 2,009 2,204 2,413 (+) Beginning IC 489 2,719 2,012 2,504 2,765 2,825 2,948 3,122 (-) Currency IC 2,719 2,012 2,504 2,765 2,825 2,948 3,122 3,337 FCF (687) 1,936 1,077 1,358 1,767 1,887 2,030 2,197

Automatic Data Processing (ADP)Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth 3.00% CV ROIC 77% WACC 6.66% Cost of Equity 6.87%

Fiscal Years Ending June. 30 2017E 2018E 2019E 2020E 2021E

DCF ModelDiscount period 1 2 3 4 5NOPLAT 1619 1828 2009 2204 2413Continuing Value 65318Free Cash Flow 1358 1767 1887 2030 2197Net FCF 1358 1767 1887 2030 67515(Discounting Factor) ^-1 0.94 0.88 0.82 0.77 0.72 PV of free cash flows 1273 1554 1555 1569 48917Value of Operations 54868 0

Non Operating AssetsExcess Cash 2,957.74 Long-term receivables, net 27.10 Short-term marketable securities 23.50 Value of Non Operating Assets 3,008.34

Non Operating LiabilitiesPV of Operating Leases 434.72 Total Debt 2,007.70 PV of employee stock options 182.82 Value of Non Operating Liabilities 2,625.24

Equity Value 55,251.10 Shares outstanding 455.70 Intrinsic Share Price (FY 16 End) 121.24 Intrinsic Share Price (Today) 125.76 Current Share Price $101.45

Fiscal Years Ending June. 30 2017E 2018E 2019E 2020E 2021E

EP ModelPeriods to discount 1 2 3 4 5Economic Profit 1,452.22 1,643.72 1,821.29 2,007.36 2,204.76 Continuing Value 61,981.19 Net EP 1,452.22 1,643.72 1,821.29 2,007.36 64,185.95 (Discounting Factor) ^-1 0.94 0.88 0.82 0.77 0.72 PV of Economic Profit 1,361.59 1,444.94 1,501.12 1,551.22 46,505.05 Initial Invested Capital 2,504.08 Value of Operations 54,868

Non Operating AssetsExcess Cash 2,957.74 Long-term receivables, net 27.10 Short-term marketable securities 23.50 Value of Non Operating Assets 3,008.34

Non Operating LiabilitiesPV of Operating Leases 434.72 Total Debt 2,007.70 PV of employee stock options 182.82 Value of Non Operating Liabilities 2,625.24

Equity Value 55,251.10 Shares outstanding 455.70 Intrinsic Share Price (FY 16 End) 121.24 Intrinsic Share Price (Today) 125.96 Current Share Price $101.45

Automatic Data Processing (ADP)Key Management Ratios

Fiscal Years Ending June. 30 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

Liquidity RatiosCurrent Ratio (Current Assets/ Current Liabilities)1.08 1.06 1.10 1.09 1.07 1.06 1.05 1.04 Operating Cash Flow Ratio (Operating CF/ Current Liabilities)0.08 0.07 0.05 0.04 0.05 0.06 0.06 0.06 Cash Ratio (Cash / Current liabilities) 0.08 0.06 0.09 0.07 0.05 0.04 0.03 0.02 Quick Ratio ex Cash 1.00 1.00 1.01 1.02 1.02 1.02 1.02 1.02

Activity or Asset-Management RatiosAsset Turnover Ratio (Sales/Avg Total Assets) 0.38 0.34 0.30 0.29 0.30 0.32 0.34 0.36 Receivables Turnover Ratio (Sales/Average Accounts Receivable)7.18 6.54 7.09 6.92 6.93 6.95 6.96 6.97 Total Assets Turnover ex Cash 0.41 0.35 0.29 0.30 0.32 0.33 0.35 0.36

Financial Leverage RatiosDebt-to-Equity Ratio (Total Debt/Total Equity) 0.00 0.00 0.45 0.49 0.53 0.57 0.63 0.67 Equity Ratio (Total Equity/ Total Assets) 0.21 0.15 0.10 0.09 0.08 0.07 0.06 0.06 Interest Coverage Ratio (EBITDA/Interest Expense) 367.53 311.52 39.27 30.68 34.91 39.71 45.06 49.39

Profitability RatiosReturn on Assets (Net Income/Total Assets) 5% 4% 3% 4% 4% 4% 5% 5%Return on Equity (Net Income/Shareholders Equity)23% 30% 33% 41% 51% 62% 74% 87%EBIT Margin (EBIT/Sales) 18% 18% 18% 18% 18% 19% 19% 19%Profit Margin (Net Income/Sales) 12% 13% 13% 13% 13% 14% 14% 14%Gross Margin = (Sales-COGS)/Sales 41% 41% 41% 41% 41% 42% 42% 42%

Payout Policy RatiosTotal Payout Ratio = (Dividend+Repurchases)/Net Income 133% 126% 120% 115% 110%Payout Ratio = Dividend/Net Income 60% 64% 65% 61% 61% 61% 61% 61%

Automatic Data Processing (ADP)Cash Flow Statement

Fiscal Years Ending June. 30 2017E 2018E 2019E 2020E 2021ECash flow from operations:Net Income (loss) 1,634.7 1,802.7 1,973.6 2,161.8 2,362.9 Add Depreciation, Amortization , Depletion , Impairment291.6 242.0 198.2 166.8 146.2 Changes : Assets:Short-term marketable securities (0.2) (0.2) (0.2) (0.2) (0.2) Accounts receivable, net (123.7) (138.6) (155.8) (175.6) (198.6) Other current assets (49.8) (55.8) (62.7) (70.7) (80.0) Funds held for clients (812.2) (831.7) (851.6) (872.1) (893.0) Other non current assets (87.5) (98.1) (110.2) (124.3) (140.6) Long-term receivables, net (1.9) (2.2) (2.4) (2.7) (3.1) Liabilities:Accounts payable 10.8 12.1 13.6 15.3 17.4 Accrued expenses & other current liabilities 88.5 99.1 111.4 125.6 142.1 Accrued payroll & payroll-related expenses 43.8 49.0 55.1 62.1 70.3 Dividends payable (238.4) - - - - Short-term deferred revenues 16.5 18.5 20.8 23.5 26.6 Income taxes payable (28.2) - - - - Other Liabilities - - - - - Client funds obligations 800.0 819.2 838.8 859.0 879.6 Long-term deferred revenues 27.0 30.3 34.1 38.4 43.4 Other liabilities 49.8 55.7 62.7 70.7 79.9 Deferred income taxes (16.0) 24.2 24.6 27.1 28.9 Net cash flow from operating activities 1,604.6 2,026.4 2,149.9 2,304.6 2,481.7

Cash flow from investing :Assets: Long-term marketable securities (0.2) (0.2) (0.2) (0.2) (0.2) Property, plant & equipment, net (66.7) (69.2) (71.7) (74.3) (77.0) Goodwill - - - - - Intangible assets, net (147.9) (156.2) (165.0) (174.3) (184.2)

Net cash flow from investing activities (214.8) (225.6) (236.9) (248.8) (261.3)

Cash flow from financing:Long-term debt (58.2) (61.0) (61.0) - - Common Stock , Net of Treasury (1,154.8) (1,154.8) (1,154.8) (1,154.8) (1,154.8) Accumulated other comprehensive income (loss) - - - - - Dividends paid (974.6) (1,074.7) (1,176.6) (1,288.8) (1,408.7) Net cash flow from financing activities (2,187.6) (2,290.5) (2,392.4) (2,443.6) (2,563.5)

Net change in cash (797.7) (489.7) (479.4) (387.8) (343.1)

Beginning Cash 3,191.1 2,393.4 1,903.7 1,424.4 1,036.6 Ending Cash 2,393.4 1,903.7 1,424.4 1,036.6 693.5

Automatic Data Processing (ADP)Cash Flow Statement

Fiscal Years Ending June. 30 2012 2013 2014 2015 2016Cash flow from Operations :Net earnings (loss) 1388.5 1405.8 1515.9 1452.5 1492.5

Depreciation & amortization 323.3 317 336.2 277.9 288.6

Deferred income taxes 38.1 24.6 -50.3 -15.3 0.7

Stock-based compensation expense 78.7 96.4 138.4 143.2 137.6

Excess tax benefit related to exercise of stock options & restricted stock -5.7 - - -68.4 -37.4

Net pension expense 36.7 43.7 29.7 17.6 17.7

Net realized loss (gain) from the sales of marketable securities -24.4 -28.6 -16.5 -4.9 5

Net amortization of premiums & accretion of discounts on available-for-sale securities 60 79.3 94.4 100.3 94.1

Other Adjustments -36.6 12.8 -32.1 -71.7 -10

Accounts receivable -40.1 -217 -204 -175.1 -224.6

Other assets -71.6 -283.5 -253.2 -109.1 -108.9

Accounts payable 11.2 -10.6 9.7 13.1 -15.9

Accrued expenses & other liabilities 152.1 135.9 253 122.1 220.5

Proceeds from the sale of notes receivable - - - 226.7 -

Operating activities of discontinued oeprations - 1.4 0.2 -3.3 -

Net cash flows from operating activities 1910.2 1577.2 1821.4 1905.6 1859.9

Cash flow from Investing :

Purchases of corporate & client funds marketable securities -5113.5 -4902.6 -3414.9 -5047.6 -5876.3

Proceeds from the sales & maturities of corporate & client funds marketable securities 3962.2 3638.6 2059.5 3841 5215.4

Net decrease (increase) in restricted cash & cash equivalents & other restricted assets held to satisfy client funds obligations4855 -161 2537.8 - -

Net decrease (increase) in restricted cash & cash equivalents held to satisfy client funds obligations - - - -2960.6 -8218.2

Capital expenditures -140.1 -174.6 -216.6 -158.8 -168.5

Additions to intangibles -109.5 -108.3 -151.1 -176.7 -217.5

Acquisitions of businesses, net of cash acquired -265.7 -42 -25.7 -8.1 -

Proceeds from the sale of property, plant & equipment 71.6 - - - -

Proceeds from the sale of property, plant, & equipment & other assets - 10 0.4 23.6 15.7

Dividend received from CDK Global, Inc. - - - 825 -

Cash retained by CDK Global, Inc. - - - -180 -

Other investing activities -16.4 0.7 - - -

Proceeds from the sale of divested business - 161.4 24.4 98.6 162.2

Investing activities of discontinued operations - -0.6 -0.5 -16.7 -

Net cash flows from investing activities 3243.6 -1578.4 813.3 -3760.3 -9087.2

Cash flow from Financing :

Net increase (decrease) in client funds obligations -3726.6 1138.5 -2989.5 6074.4 8803.3

Proceeds from debt issuance - - - - 1998.3

Payments of debt -2 -17.5 -3.3 -2.3 -1.5

Proceeds from issuance of notes - - - - -

Repurchases of common stock -741.3 -647.3 -667.3 -1557.2 -1155.7

Proceeds from stock purchase plan & exercise of stock options 250 235.3 219.1 109.1 75.3

Excess tax benefit related to exercise of stock options & restricted stock 5.7 - - 68.4 37.4

Dividends paid -739.7 -805.5 -883.1 -927.6 -943.6

Net proceeds from (repayments of) reverse repurchase agreements - 245.9 -245.9 - -

Net proceeds from issuance of (repayments of) commercial paper - - 2173 -2173 -

Other financing activities - 1.6 38.8 23.4 -23.4

Financing activities of discontinued operations - - - 1.5 -

Net cash flows from financing activities -4953.9 151 -2358.2 1616.7 8790.1

Effect of exchange rate change on cash & cash equivalents -41.2 1.2 8 -106.3 -11

Net change in cash & cash equivalents 158.7 151 284.5 -344.3 1551.8

Cash & cash equivalents, beginning of year 1389.4 1548.1 1699.1 1983.6 1639.3

Cash & cash equivalents, end of year 1548.1 1699.1 1983.6 1639.3 3191.1

Cash & cash equivalents of continuing operations, end of year - - - - 3191.1

Automatic Data Processing (ADP)Common Size Income Statement

Fiscal Years Ending June. 30 (% of sales) 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

Revenues 78.4% 72.5% 70.6% 68.3% 66.0% 63.5% 60.9% 58.2%

Interest on funds held for clients 3.1% 3.5% 3.2% 3.0% 2.9% 2.7% 2.5% 2.3%

PEO revenues 18.5% 24.1% 26.2% 28.6% 31.2% 33.8% 36.6% 39.5%

Total revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Operating expenses 51.2% 51.4% 51.6% 51.6% 51.6% 51.6% 51.6% 51.6%Systems development & programming costs 5.9% 5.4% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2%Depreciation & amortization 2.1% 1.9% 1.8% 2.3% 1.8% 1.4% 1.1% 0.9%Total costs of revenues 59.2% 58.8% 58.6% 59.1% 58.6% 58.2% 57.9% 57.7%Selling, general & administrative expenses 22.6% 22.8% 22.6% 22.6% 22.6% 22.6% 22.6% 22.6%Separation costs 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Goodwill impairment 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Interest expense 0.0% 0.1% 0.5% 0.6% 0.5% 0.5% 0.4% 0.4%Total expenses 82.0% 81.6% 81.7% 82.3% 81.8% 81.3% 80.9% 80.7%Interest income on corporate funds 0.5% 0.5% 0.5% 0.7% 0.6% 0.4% 0.3% 0.2%Other income, net 0.1% 0.1% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%Earnings (loss) from continuing operations before income taxes 18.6% 18.9% 19.2% 18.6% 19.1% 19.4% 19.7% 19.8%Provision (benefit) for income taxes 6.3% 6.3% 6.4% 5.6% 5.7% 5.8% 5.9% 5.9%

Net earnings from continuing operations 12.3% 12.6% 12.8% 13.1% 13.4% 13.6% 13.8% 13.9%

Net earnings (loss) from discontinued operations 0.1% 0.7% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Net earnings (loss) 12.4% 13.3% 12.8% 13.1% 13.4% 13.6% 13.8% 13.9%

Automatic Data Processing (ADP)Common Size Balance Sheet

Fiscal Years Ending June. 30 (% of sales) 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

Cash & cash equivalents 16.25% 14.99% 27.35% 19.15% 14.18% 9.85% 6.63% 4.09%Short-term marketable securities 16.65% 0.24% 0.20% 0.19% 0.18% 0.17% 0.16% 0.15%Accounts receivable, net 14.75% 14.14% 14.94% 14.94% 14.94% 14.94% 14.94% 14.94%Other current assets 6.22% 6.68% 6.01% 6.01% 6.01% 6.01% 6.01% 6.01%Funds held for clients 157.77% 227.32% 290.04% 277.32% 264.35% 251.18% 237.88% 224.50%Total current assets 211.64% 263.37% 338.54% 317.61% 299.66% 282.15% 265.61% 249.68%Long-term marketable securities 0.44% 0.26% 0.07% 0.06% 0.06% 0.06% 0.05% 0.05%Long-term receivables, net 1.27% 0.29% 0.23% 0.23% 0.23% 0.23% 0.23% 0.23%Gross Property, plant & equipment 0.00% 16.24% 15.78% 15.27% 14.73% 14.16% 13.57% 12.96%Acc Deprection 0.00% -10.09% -9.91% -10.35% -10.56% -10.58% -10.45% -10.21%Property, plant & equipment, net 6.37% 6.15% 5.87% 4.91% 4.17% 3.58% 3.12% 2.75%Other assets 12.17% 11.62% 10.57% 10.57% 10.57% 10.57% 10.57% 10.57%Goodwill 25.51% 16.40% 14.42% 13.46% 12.53% 11.63% 10.75% 9.91%Gross Intangibles 0.00% 22.70% 22.48% 22.18% 21.81% 21.38% 20.88% 20.33%Amortization 0.00% -18.10% -17.90% -17.95% -17.59% -16.91% -16.04% -15.06%Intangible assets, net 5.18% 4.60% 4.58% 4.23% 4.22% 4.47% 4.85% 5.27%Total assets 262.58% 302.70% 374.28% 351.08% 331.44% 312.68% 295.19% 278.47%Accounts payable 1.39% 1.78% 1.31% 1.31% 1.31% 1.31% 1.31% 1.31%Accrued expenses & other current liabilities 10.77% 10.60% 10.69% 10.69% 10.69% 10.69% 10.69% 10.69%Accrued payroll & payroll-related expenses 5.79% 5.73% 5.29% 5.29% 5.29% 5.29% 5.29% 5.29%Dividends payable 1.86% 2.07% 2.04% 0.00% 0.00% 0.00% 0.00% 0.00%Short-term deferred revenues 2.72% 2.09% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%Income taxes payable 0.17% 0.25% 0.24% 0.00% 0.00% 0.00% 0.00% 0.00%Other Liabilities 17.80% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Client funds obligations 155.35% 225.36% 285.67% 273.15% 260.37% 247.40% 234.30% 221.12%Total current liabilities 195.86% 247.87% 307.23% 292.42% 279.65% 266.68% 253.57% 240.39%Long-term debt 0.09% 0.08% 17.21% 15.60% 14.07% 12.63% 11.68% 10.77%Other liabilities 5.41% 5.89% 6.01% 6.01% 6.01% 6.01% 6.01% 6.01%Deferred income taxes 2.37% 1.57% 2.15% 1.88% 1.93% 1.96% 1.99% 2.00%Long-term deferred revenues 4.20% 3.32% 3.27% 3.27% 3.27% 3.27% 3.27% 3.27%Total liabilities 207.93% 258.74% 335.87% 319.18% 304.92% 290.55% 276.52% 262.44%Common stock 0.52% 0.58% 0.55% 0.51% 0.48% 0.44% 0.41% 0.38%Capital in excess of par value 4.47% 6.06% 6.58% 6.51% 6.40% 6.25% 6.07% 5.86%Retained earnings 111.69% 123.05% 120.02% 117.35% 114.66% 111.90% 109.07% 106.15%Treasury stock-at cost -63.49% -83.36% -86.89% -90.74% -93.41% -94.97% -95.50% -95.09%Accumulated other comprehensive income (loss) 1.46% -2.38% -1.84% -1.72% -1.60% -1.49% -1.38% -1.27%Total stockholders' equity 54.64% 43.96% 38.41% 31.91% 26.52% 22.14% 18.67% 16.03%

Automatic Data Processing (ADP)Weighted Average Cost of Capital (WACC) Estimation

Marginal Tax Rate 29.80%Cost of equity CalculationRisk Free Rate 3.03%+Beta* 0.80Market Risk Premium 4.80%= Cost of Equity 6.8700%

WACC Calculation All figures in millionsShares outstanding* 455.700MV of share 101.45=Total MV of Equity [E] 46,231

ST DebtLT Debt 2007.7PV of Operating Leases 434.72MV of debt [D] 2442.42

Cost of Debt 3.73%

MV of equity 46230.77+MV of debt 2442.42= MV of the firm [V] 48673.19

Cost of Equity * 6.87%(E/V) 94.98%+Cost of Debt * 3.73%(1-Marginal tax Rate) 70.20%(D/V) 5.02%= WACC 6.66%

Automatic Data Processing (ADP)Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending June. 30 2017E 2018E 2019E 2020E 2021E

EPS 3.68 4.15 4.65 5.20 5.80

Key Assumptions CV growth 3.00% CV ROE 86.87% Cost of Equity 6.87%

Future Cash Flows P/E Multiple (CV Year) 24.95 EPS (CV Year) 5.80 Future Stock Price 144.78 Dividends Per Share 2.19 2.48 2.77 3.10 Future Cash Flows 2.19 2.48 2.77 3.10 144.78

Discounted Cash Flows 2.05 4.63 2.27 2.38 110.99

Intrinsic Value 122.32$

Automatic Data Processing (ADP)Relative Valuation Models

EPS EPSTicker Company Price 2017E 2018E P/E 17 P/E 18NSP Insperity, Inc. 88.65 4.30 4.92 20.6 18.04 0.56 0.51

PAYX Pay Chex, Inc 58.90 2.22 2.39 26.5 24.64 6.71 6.31

TNET TriNet Group Inc 28.90 1.37 1.64 21.1 17.68 2.78 2.50

INTU Intuit 115.99 4.35 4.96 26.7 23.39 5.84 5.40

BR Broadridge Financial Sol 67.95 3.12 3.63 21.8 18.70 1.97 1.86

PYPL PayPal Holdings 43.02 1.73 2.04 24.8 21.13 4.11 3.52

ULTI Ultimate Software Gp 195.21 3.96 4.91 49.3 39.77 5.98 4.92

DST DST Systems 122.50 6.46 7.50 19.0 16.33 1.83 1.68

CSGS CSG Systems 37.81 2.39 2.53 15.8 14.97 1.59 1.55

SABR Sabre 21.19 1.37 1.50 15.5 14.10 1.64 1.54

WAGE WageWorks 72.30 1.77 2.04 40.9 35.50 5.57 5.05

Average 23.6 20.6 3.7 3.3

ADP Automatic Data Processing (ADP)$101.45 3.68 4.15 27.6 24.4 3.6 3.3

Implied Value: Relative P/E (EPS17) $ 86.74 Relative P/E (EPS18) 85.52$ Price to sales Ratio (EPS17) 102.96$ Price to sales Ratio (EPS18) 103.55$

Price to sales 17

Price to sales 18

Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015) Present Value of Operating Lease Obligations (2014)

Operating Operating OperatingFiscal Years Ending June. 30 Leases Fiscal Years Ending June. 30 Leases Fiscal Years Ending June. 30 Leases2017 106.2 2016 89.6 2015 209.92018 106.1 2017 80.6 2016 147.32019 78.9 2018 63.6 2017 87.92020 59.6 2019 40.1 2018 53.22021 39.5 2020 26.6 2019 29.8Thereafter 100.8 Thereafter 20.4 Thereafter 32.6Total Minimum Payments 491.1 Total Minimum Payments 320.9 Total Minimum Payments 560.7Less: Interest 56 Less: Interest 29 Less: Interest 46PV of Minimum Payments 435 PV of Minimum Payments 291 PV of Minimum Payments 515

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 3.73% Pre-Tax Cost of Debt 3.73% Pre-Tax Cost of Debt 3.73%Number Years Implied by Year 6 Payment 2.6 Number Years Implied by Year 6 Payment 1.0 Number Years Implied by Year 6 Payment 1.1

Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment1 106.2 102.4 1 89.6 86.4 1 209.9 202.42 106.1 98.6 2 80.6 74.9 2 147.3 136.93 78.9 70.7 3 63.6 57.0 3 87.9 78.84 59.6 51.5 4 40.1 34.6 4 53.2 46.05 39.5 32.9 5 26.6 22.1 5 29.8 24.86 & beyond 39.5 78.7 6 & beyond 20.4 16.4 6 & beyond 29.8 26.1PV of Minimum Payments 434.7 PV of Minimum Payments 291.4 PV of Minimum Payments 514.9

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 5Average Time to Maturity (years): 7.00Expected Annual Number of Options Exercised: 1

Current Average Strike Price: 65.00$ Cost of Equity: 6.87%Current Stock Price: $101.45

2017E 2018E 2019E 2020E 2021E 2022E 2023E

Increase in Shares Outstanding: 1 1 1 1 1 1 1Average Strike Price: 65.00$ 65.00$ 65.00$ 65.00$ 65.00$ 65.00$ 65.00$ Increase in Common Stock Account: 45 45 45 45 45 45 45

Change in Treasury Stock 1,200 1,200 1,200 1,200 1,200 1,200 1,200Expected Price of Repurchased Shares: 101.45$ 108.42$ 115.87$ 123.83$ 132.34$ 141.43$ 151.14$ Number of Shares Repurchased: 12 11 10 10 9 8 8

Shares Outstanding (beginning of the year) 456 445 434 425 416 407 399Plus: Shares Issued Through ESOP 1 1 1 1 1 1 1Less: Shares Repurchased in Treasury 12 11 10 10 9 8 8 Shares Outstanding (end of the year) 445 434 425 416 407 399 392

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol ADPCurrent Stock Price $101.45Risk Free Rate 3.03%Current Dividend Yield 2.00%Annualized St. Dev. of Stock Returns 17.16%

Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 4.869 65.00 7.00 37.55$ 183$

Total 5 65.00$ 7.00 49.66$ 183$