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ADP Up 4.3% Since Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Automatic Data Processing, Inc. (ADP - Free Report) . Shares have added about 4.3% 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.

ADP Beats Q3 Earnings Estimates, New Bookings Decline

ADP reported third-quarter fiscal 2017 adjusted earnings from continuing operations of $1.29 per share, beating the Zacks Consensus Estimate of $1.23.

Including $0.02 per share tax benefit related to the adoption of new stock-based compensation accounting guidance, earnings were $1.31 per share, up 12% from the year-ago quarter.

However, revenues of $3.41 billion missed the Zacks Consensus Estimate of $3.43 billion but grew 5% on a year-over-year basis.

Quarter Details

Employer Services revenues in the quarter increased 2% year over year to $2.63 billion at constant currency. The number of employees on ADP clients' payrolls in the U.S. increased 2.5% on a same-store-sales basis. Client revenues retention declined 170 basis points (bps) on a year-over-year basis.

PEO Services revenues surged 12% year over year to $974.4 million.

In the quarter, combined worldwide new business bookings for the company declined 7% on a year-over-year basis. New business bookings represent annualized recurring revenues anticipated from new orders.

Interest on funds held for clients in the quarter increased 9% to $112 million. The company’s average client funds balance inched up 2% year over year to $27.3 billion in the quarter while average interest yield of 1.6% was up 10 bps on a year-over-year basis.

Adjusted EBIT margin declined almost 20 bps to 24.6% primarily due to slower revenue growth and increased investments on product, sales, and service including dual operation costs related to the company’s Service Alignment Initiative.

Employer Services segment margin decreased approximately 40 bps on a year-over-year basis. Meanwhile, PEO Services segment margin increased approximately 100 bps in the quarter.

Guidance

ADP still anticipates year-over-year revenue growth of 6%. New business bookings are expected to decrease 5–7%, when compared to the $1.75 billion sold in fiscal 2016. Earlier, the company had anticipated new business bookings to remain flat on a year-over-year basis.

ADP continues to expect adjusted earnings to grow 17–18%, up from 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%. The company estimates pay per control to increase 2.5% for the year.

PEO Services revenues are expected to increase 13% and margin expansion of at least 100 bps.

Additionally, the company anticipates interest on funds held for clients to increase $20 million or about 6% as compared with earlier guidance of $15 million, or approximately 4% 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 $15 million (up from $10 million).

How Have Estimates Been Moving Since Then?

It turns out, fresh estimate have trended downward during the past month. There has been one revision higher for the current quarter compared to three lower.

Automatic Data Processing, Inc. Price and Consensus

 

VGM Scores

At this time, the stock has a subpar Growth Score of 'D', however its Momentum is doing a lot better with a 'A'. 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.

The company's stock is suitable solely for momentum based on our styles scores.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. Notably, the stock has a Zacks Rank #3 (Hold). We are looking for an inline return from the stock in the next few months.


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