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Why Is Automatic Data Processing (ADP) Up 7% Since Its Last Earnings Report?

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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 7% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is ADP due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Third-quarter Fiscal 2018 Earnings

Automatic Data Processing reported better-than-expected third-quarter fiscal 2018 results.

Adjusted earnings per share surpassed the Zacks Consensus Estimate by 8 cents and increased 16% year over year. Revenues came in at $3.69 billion, outpacing the consensus mark by $26 million. The top-line figure improved 8% on a reported basis and 6% on a constant-currency basis.

Segment in Details

Employer Services revenues of $2.80 billion increased 7% year over year on a reported basis and 4% on an organic constant-currency basis. The number of employees on ADP clients' payrolls in the United States rose 2.9% on a same-store-sales basis. Client revenues retention increased 170 basis points (bps) on a year-over-year basis.

PEO Services revenues were up 10% year over year to $1.1 billion. The upside was driven by 9% increase in average worksite employees. Average worksite employees paid by PEO Services were roughly 512,000.

Interest on funds held for clients in the fiscal third quarter increased 21% to $135 million. The company’s average client funds balances climbed 6% year over year to $28.8 billion, while average interest yield of 1.9% was up 20 bps on a year-over-year basis.

Margins

Adjusted EBIT margin contracted almost 20 bps to 24.4% primarily due to higher pass-through revenues and expenses related to acquisitions. The Employer Services segment’s margin fell roughly 20 bps on a year-over-year basis. On the flipside, the PEO Services segment's margin improved approximately 40 bps in the quarter.

2018 Guidance

ADP raised 2018 guidance for adjusted earnings, adjusted EBIT margin and worldwide new business bookings growth but reiterated the same for revenue growth in the band of 7-8%. Acquisitions and impact from foreign currency translation are projected to add approximately two percentage points of growth to revenues instead one percentage point projected in the previous guidance.

Adjusted EBIT margin is anticipated to be more or less flat compared to the prior anticipation of a decline of almost 50 bps. ADP expects growth in worldwide new business bookings of 6-7% compared with the previous expectation of 5-7%.

Also, adjusted earnings are envisioned to grow in the 16% to 17%, up from 12% to 13% guided earlier. ADP expects an adjusted effective tax rate of 26.2% compared with previous forecast of 26.9% for fiscal 2018.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been seven revisions higher for the current quarter.

VGM Scores

At this time, ADP has an average Growth Score of C and a grade with the same score on the momentum front. The stock was also allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is equally suitable for value, growth, and momentum investors.

Outlook

Estimates have been trending upward for the stock and the magnitude of these revisions looks promising. It comes with little surprise ADP has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.




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