Automatic Data Takes Over Cobalt – Analyst Blog

A leading provider of outsourced HR solutions and payroll processing services, Automatic Data Processing Inc. (ADP) announced the acquisition of privately held Cobalt Group for approximately $400 million in cash. Subject to regulatory approval, the acquisition will likely be complete within the next four to six weeks.

 

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

 

Management expects the acquisition to be slightly accretive to earnings in the first year of closing, while boosting earnings in the 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 Automatic Data’s Dealer Services’ global applications strategy.

 

In the most recent quarter (third quarter of 2010), Dealer Services revenues were $310.3 million, a decrease of 3% year over year due to continued dealership closings, lower transactional revenues and lower international software license fee revenues.

 

The company projects dealer-services revenues to decline in the range of 3% to 4% for the full fiscal year 2010. However, 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 help the company win new customers in the automotive industry and expand its auto dealer offering. Moreover, Automatic Data pointed out that the acquisition will complement its core business and will be able to strengthen its existing relationship with automobile manufacturers by providing digital marketing solutions.

 

 

Automatic Data is set to release its fourth quarter results on July 29, before the market opens.

 

Management expects fiscal 2010 to be flat compared with the 2009 level. The company had reported revenues of approximately $8.84 billion in 2009. The analysts believe that although Automatic Data will report 2010 revenues in line with the 2009 level, revenues will likely grow in 2011 with a significantly higher growth in fiscal 2012 and beyond.

 

For the fiscal 2010, earnings per share from continuing operations are expected to be in the range of $2.36 to $2.38 compared with $2.38 in fiscal 2009. The current Zacks Consensus Estimate for earnings is pegged at $2.39 per share for the full year 2010, one cent above the company’s high end of the guided range.

 

For the fourth quarter, the Zacks Consensus Estimate for earnings is 42 cents per share, down 3 cents from 45 cents reported in the year-ago period.

 

 

None of analysts covering the stock made any estimate revision during the last 30 days for the full year 2010. However, in the last 30 days, 1 out of total 22 analysts lowered earnings estimate for the fourth quarter 2010. The Zacks Consensus Estimate for the fourth quarter and full year 2010 earnings per share remained unchanged during the last 30 days.

 

Currently Automatic Data is a short-term Zacks #3 Rank (Hold) stock, due to the lack of material estimate revision in the last 30 days. 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.