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ADP Set to Report Q4 Earnings: Disappointment in Store?

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Automatic Data Processing Inc. (ADP - Free Report) is set to release fourth-quarter fiscal 2017 earnings on Jul 27. Notably, the company has beaten the Zacks Consensus Estimate in all of the trailing four quarters, with an average positive surprise of 7.15%.

In the last quarter, ADP delivered a positive earnings surprise of 6.50%. Adjusted earnings from continuing operations of $1.31 per share increased 12% on a year-over-year basis. However, revenues of $3.41 billion missed the Zacks Consensus Estimate of $3.43 billion but grew 5% on a year-over-year basis.

Management now expects new business bookings to decline year over year in fiscal 2017. Earlier, the company anticipated new business bookings to remain flat on a year-over-year basis. The decline in management’s expectation primarily reflects growing competition from the likes of Paychex (PAYX - Free Report) , Equifax and The Ultimate Software Group.

We note that ADP has underperformed the S&P 500 on a year-to-date basis. While the index gained 10.7%, the stock has returned 1.8%.

Let’s see how things are shaping up for this announcement.

Factors to Consider

Apart from stiff competition, we expect ADP’s investments in new initiatives to weigh on near-term earnings. Moreover, the divestiture of Consumer Health Spending Account (CHSA) and Consolidated Omnibus Reconciliation Act (COBRA) businesses will impact top-line growth.

Nevertheless, we note that ADP holds a dominant position in the payroll processing and human capital management (HCM) market, primarily owing to its robust product portfolio. This is also evident from the recent recognitions which the company’s solutions have received.

ADP’s GlobalView HCM was named to the Constellation ShortList for Global Human Capital Management (HCM) Suites for the second consecutive quarter in April.

In May, Frost & Sullivan honored ADP as the “2016 North American HR Management Solutions Company of the Year”.

ADP’s Accountant Connect solution also received “2017 CPA Practice Advisor Tax and Accounting Technology Innovation Award” in Jun.

We believe that the company’s product strength will continue to drive higher revenue per client and customer retention ratio in the going-to-be-reported quarter.

Earnings Whispers

Our proven model does not conclusively show that ADP is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Zacks ESP: ADP’s Earnings ESP is +2.99%. This is because the Most Accurate estimate of 69 cents is couple of cents higher that the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: However, ADP carries a Zacks Rank #4 (Sell). We caution against stocks with a Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies you may want to consider as our model shows that they have the right combination of elements to post an earnings beat this quarter:

Cypress Semiconductor (CY - Free Report) has an Earnings ESP of +11.11% and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

IPG Photonics Corporation (IPGP - Free Report) has an Earnings ESP of +3.07% and boasts a Zacks Rank #1.

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