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ADP (ADP) Up 3.5% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Automatic Data Processing (ADP - Free Report) . Shares have added about 3.5% in that time frame, outperforming the S&P 500.

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.

ADP Q1 Earnings, Revenues Surpass Estimates, 2019 View Up

Automatic Data Processing reported strong first-quarter fiscal 2019 results, wherein both earnings and revenues surpassed the Zacks Consensus Estimate. Both the metrics also improved on a year-over-year basis.

Adjusted earnings per share (EPS) of $1.20 beat the Zacks Consensus Estimate by 10 cents and improved on year-over-year basis. The bottom line benefited from unplanned tax benefits (5 cents per share) related to stock-based compensation. Notably, ADP enjoyed a lower effective tax rate of 22.2% compared with 27.1% in the year-ago quarter on an adjusted basis

Total revenues of $3.32 billion outpaced the consensus mark by $40.6 million. The top-line figure improved 8% on a reported basis and 7% on a constant-currency basis.

Quarterly results also benefited from growth in new business bookings. The company’s service alignment initiative, client migrations and transformation initiatives have resulted in improvement in its client satisfaction scores and productivity.

Segment in Details

Employer Services revenues of $2.33 billion increased 7% year over year on a reported basis and 6% on an organic constant-currency basis. The number of employees on ADP clients' payrolls in the United States rose 2.4%. New business bookings increased 8% in the reported quarter.

PEO Services revenues were up 10% year over year to $987.8 million. Average worksite employees paid by PEO Services were 528,000, up 9% from the prior-year quarter.

Interest on funds held for clients in the fiscal first-quarter 2019 increased 19% to $119 million. The company’s average client funds balance climbed 5% year over year to $22.2 billion. Average interest yield on client funds was 2.1%, up 30 basis points (bps) on a year-over-year basis.

Margins

Adjusted EBIT came in at $686.7 million, up 18.2% on a year-over-year basis. Adjusted EBIT margin increased about 180 bps in the quarter to 20.7%. The margin improvement was driven by benefits from operational efficiencies and transformation initiatives, which, however, were partially offset by around 50 bps of pressure from acquisitions.

Segment-wise, Employer Services segment’s margin increased 260 bps on a year-over-year basis. The same for PEO Services segment improved approximately 110 bps in the quarter.

Balance Sheet and Cash Flow

ADP exited first-quarter fiscal 2019 with cash and cash equivalents of $1.49 billion compared with $2.17 billion in the prior quarter. Long-term debt of $2.00 billion remained flat sequentially.

The company generated $149.20 million of net cash from operating activities in the reported quarter. Capital expenditures were $43.2 million.

The company paid dividends worth $302.6 million and repurchased shares worth $227.1 million.

Fiscal 2019 Outlook

ADP raised its fiscal 2019 guidance for revenue growth and adjusted earnings growth and reaffirmed the same for adjusted EBIT margin growth.

For fiscal 2019, revenues are now expected to register 6-7% growth compared with the growth range of 5-7% guided earlier. Adjusted earnings per share are expected to register 15-17% growth compared with 13-15% growth guided earlier.

The company continues to expect adjusted EBIT margin growth of 100 to 125 bps. Adjusted effective tax rate is anticipated around 24.5% compared with 25.1% guided earlier.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

Currently, ADP has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. Following the exact same course, 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 F. If you aren't focused on one strategy, this score is the one you should be interested in.

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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