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Automatic Data (ADP) Up 8.1% Since Earnings Report: Can It Continue?
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A month has gone by since the last earnings report for Automatic Data Processing, Inc. (ADP - Free Report) . Shares have added about 8.1% in that time frame, outperforming the market.
Will the recent positive trend continue leading up to the stock’s next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Recent Earnings
ADP reported second-quarter fiscal 2017 adjusted earnings from continuing operations of $1.13 per share, which beat the Zacks Consensus Estimate of $0.81 and jumped 52.7% on a year-over-year basis.
After adjusting for gain on sale of business ($0.27), ADP reported earnings $0.87 per share, which increased 20% from the year-ago quarter.
However, revenues of almost $2.99 billion missed the Zacks Consensus Estimate of $3.02 billion but grew 6.4% on a year-over-year basis.
Quarter Details
Employer Services revenues in the quarter increased 4% year over year to $2.31 billion at constant currency. The number of employees on ADP clients' payrolls in the U.S. increased 2.3% on a same-store-sales basis. Client revenue retention was up 10 basis points (bps) on a year-over-year basis.
PEO Services revenues surged 12% year over year to $822.9 million.
In the quarter, combined worldwide new business bookings for the company declined 5% on a year-over-year basis. New business bookings represent annualized recurring revenues expected from new orders.
Interest on funds held for clients in the quarter increased 3% to $92 million. The company’s average client funds balance inched up 2% year over year to $20.9 billion in the quarter while average interest yield of 1.8% remained flat on a year-over-year basis.
Cost of revenues as percentage of revenues declined 80 bps to 59.2%, primarily due to lower operating expenses (down 50 bps) as well as systems development & programming costs (down 20 bps). As a result, gross margin expanded by the same magnitude on a year-over-year basis to 40.8%.
Moreover, selling, general & administrative (SG&A) expense as percentage of revenues declined 90 bps in the reported quarter.
Employer Services segment margin increased approximately 150 bps on a year-over-year basis driven by operational efficiencies and slower growth in selling expenses. Further, PEO Services segment margin increased approximately 120 bps in the quarter.
ADP exited first-quarter 2017 with cash and cash equivalents (including short-term marketable securities) of approximately $2.71 billion compared with $2.82 billion as on Sep 30, 2016. Long-term debt was approximately $2 billion at the end of the quarter.
Acquisition
In Jan 2017, ADP acquired The Marcus Buckingham Company for total cash consideration of approximately $70 million and contingent consideration of up to $35 million payable over the next three years on fulfilment of certain conditions.
Guidance
ADP now anticipates year-over-year revenue growth of 6%, down from previous guidance of 7% to 8% for fiscal 2017. New business bookings are expected to remain flat from fiscal 2016, down from previous growth expectation of 4–6%.
ADP continues to expect adjusted earnings to grow 15–17% over fiscal 2016 level. This represents almost 50 bps expansion in adjusted EBIT margin.
The company projects Employer Services revenues to grow in the range of 3–4%, down from earlier guidance of 4–5% in fiscal 2017. The company estimates pay per control to increase 2.5% in the year.
PEO Services revenues are expected to increase 13% down from earlier guidance range of 14–16% in the year.
Additionally, the company expects interest on funds held for clients to increase $15 million or about 4% as compared with earlier guidance of $5–$10 million, or approximately 2–3% over fiscal 2016 level.
It is based on estimated growth in average client funds balances of 3% from $22.4 billion in fiscal 2016.
Further, the total contribution from client funds extended investment strategy is anticipated to be up $10 million (up from $5 million).
Management continues to expect 11% to 13% growth in adjusted earnings as compared with $3.26 per share posted in fiscal 2016. The company expects share repurchases in the range of $1.2-$1.4 billion.
How Have Estimates Been Moving Since Then?
Analysts were quiet during the last one month period as none of them issued any earnings estimate revisions.
Automatic Data Processing, Inc. Price and Consensus
At this time, ADP's stock has a subpar Growth Score of 'D', however its Momentum is doing a bit better with a 'C'. Charting a somewhat similar path, the stock was allocated a grade of 'D' on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of 'D'. If you aren't focused on one strategy, this score is the one you should be interested in.
Based on our styles scores, the stock is suitable solely for momentum investors.
Outlook
The stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.
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Automatic Data (ADP) Up 8.1% Since Earnings Report: Can It Continue?
A month has gone by since the last earnings report for Automatic Data Processing, Inc. (ADP - Free Report) . Shares have added about 8.1% in that time frame, outperforming the market.
Will the recent positive trend continue leading up to the stock’s next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Recent Earnings
ADP reported second-quarter fiscal 2017 adjusted earnings from continuing operations of $1.13 per share, which beat the Zacks Consensus Estimate of $0.81 and jumped 52.7% on a year-over-year basis.
After adjusting for gain on sale of business ($0.27), ADP reported earnings $0.87 per share, which increased 20% from the year-ago quarter.
However, revenues of almost $2.99 billion missed the Zacks Consensus Estimate of $3.02 billion but grew 6.4% on a year-over-year basis.
Quarter Details
Employer Services revenues in the quarter increased 4% year over year to $2.31 billion at constant currency. The number of employees on ADP clients' payrolls in the U.S. increased 2.3% on a same-store-sales basis. Client revenue retention was up 10 basis points (bps) on a year-over-year basis.
PEO Services revenues surged 12% year over year to $822.9 million.
In the quarter, combined worldwide new business bookings for the company declined 5% on a year-over-year basis. New business bookings represent annualized recurring revenues expected from new orders.
Interest on funds held for clients in the quarter increased 3% to $92 million. The company’s average client funds balance inched up 2% year over year to $20.9 billion in the quarter while average interest yield of 1.8% remained flat on a year-over-year basis.
Cost of revenues as percentage of revenues declined 80 bps to 59.2%, primarily due to lower operating expenses (down 50 bps) as well as systems development & programming costs (down 20 bps). As a result, gross margin expanded by the same magnitude on a year-over-year basis to 40.8%.
Moreover, selling, general & administrative (SG&A) expense as percentage of revenues declined 90 bps in the reported quarter.
Employer Services segment margin increased approximately 150 bps on a year-over-year basis driven by operational efficiencies and slower growth in selling expenses. Further, PEO Services segment margin increased approximately 120 bps in the quarter.
ADP exited first-quarter 2017 with cash and cash equivalents (including short-term marketable securities) of approximately $2.71 billion compared with $2.82 billion as on Sep 30, 2016. Long-term debt was approximately $2 billion at the end of the quarter.
Acquisition
In Jan 2017, ADP acquired The Marcus Buckingham Company for total cash consideration of approximately $70 million and contingent consideration of up to $35 million payable over the next three years on fulfilment of certain conditions.
Guidance
ADP now anticipates year-over-year revenue growth of 6%, down from previous guidance of 7% to 8% for fiscal 2017. New business bookings are expected to remain flat from fiscal 2016, down from previous growth expectation of 4–6%.
ADP continues to expect adjusted earnings to grow 15–17% over fiscal 2016 level. This represents almost 50 bps expansion in adjusted EBIT margin.
The company projects Employer Services revenues to grow in the range of 3–4%, down from earlier guidance of 4–5% in fiscal 2017. The company estimates pay per control to increase 2.5% in the year.
PEO Services revenues are expected to increase 13% down from earlier guidance range of 14–16% in the year.
Additionally, the company expects interest on funds held for clients to increase $15 million or about 4% as compared with earlier guidance of $5–$10 million, or approximately 2–3% over fiscal 2016 level.
It is based on estimated growth in average client funds balances of 3% from $22.4 billion in fiscal 2016.
Further, the total contribution from client funds extended investment strategy is anticipated to be up $10 million (up from $5 million).
Management continues to expect 11% to 13% growth in adjusted earnings as compared with $3.26 per share posted in fiscal 2016. The company expects share repurchases in the range of $1.2-$1.4 billion.
How Have Estimates Been Moving Since Then?
Analysts were quiet during the last one month period as none of them issued any earnings estimate revisions.
Automatic Data Processing, Inc. Price and Consensus
Automatic Data Processing, Inc. Price and Consensus | Automatic Data Processing, Inc. Quote
VGM Scores
At this time, ADP's stock has a subpar Growth Score of 'D', however its Momentum is doing a bit better with a 'C'. Charting a somewhat similar path, the stock was allocated a grade of 'D' on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of 'D'. If you aren't focused on one strategy, this score is the one you should be interested in.
Based on our styles scores, the stock is suitable solely for momentum investors.
Outlook
The stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.