Global Payments Inc (GPN), Automatic Data Processing (ADP): The Best American Business Services Provider

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In current times, where companies have the objective of exploiting their core competence at the focal point, this need opens the door to opportunities for the providers of business services.

The business service industry caters to demands that include marketing, consulting, staffing, security, telecommunications, internet services, logistics and waste handling.

Eventually, demand is based on business spending, which in turn is determined by the financial health of the overall economy. Individual company profits depend on efficient operations and effective marketing. Large companies are able to reap the advantages of economies of scale, and can compete for big, national accounts. Small companies can focus on highly specialized services or a market niche, or via advanced customer service. The U.S. business services sector is highly fragmented: the 50 largest companies comprise less than a quarter of sector revenue. The U.S. business services sector produces an annual revenue of $620 billion. No one business services provider has a sufficiently large market share to dominate the industry, or affect pricing decisions.

Global Payments Inc (NYSE:GPN)

Company analysis

Global Payments Inc (NYSE:GPN), Automatic Data Processing (NASDAQ:ADP) and Fiserv, Inc. (NASDAQ:FISV) deserve scrutiny from an investment stance. Let’s identify the best return generating stock in the following report.

Source: Morningstar

The business service sector industry grew at a rate of 6.5% in the preceding years of the economic downturn. Global Payments Inc (NYSE:GPN) registered a double-digit growth of 14.7% in its top line, surpassing its peers, followed by Automatic Data Processing (NASDAQ:ADP) whose revenue results were equivalent to the industry, while Fiserv, Inc. (NASDAQ:FISV) lagged behind the others. Net margin exhibited a different pattern of results, with Global Payments Inc (NYSE:GPN) posting excellent returns on the face of it. However, a one-time pre-tax impairment charge of $147,664 in fiscal 2009, pertaining to the money transfer business, caused net income to decline drastically in FY09. Thus, in FY10, net income resumed to normal levels, giving the impression of extraordinary growth. Automatic Data Processing (NASDAQ:ADP) was unable to translate its revenue growth into net margin growth in an effective manner, while Fiserv, Inc. (NASDAQ:FISV) was slightly performing above the industry.

Source: Morningstar

Overall, the ROE components of Automatic Data Processing (NASDAQ:ADP) depict the company to be a cut above the industry and its competitors, with an all-equity financed capital base. However, the other two companies have employed leverage more than the industry standard. To some extent, it provides them the opportunity to take advantage of tax benefits of debt financing and successful employment of cost management as exhibited in Fiserv, Inc. (NASDAQ:FISV)’s net income margin.

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