Shares of Automatic Data Processing, Inc. (ADP - Free Report) scaled a new 52-week low of $118.43 in the trading session on Mar 17, before closing a tad higher at $129.39.
The company’s shares have decreased 16.4% over the past year, compared with 24% loss of the industry it belongs to and 16.5% decline of the Zacks S&P500 composite.
Let’s delve deeper into the factors which have led to the company’s underperformance.
Consecutive Revenue Miss
ADP reported consecutive lower-than-expected revenue performance in the last four quarters. We believe foreign currency exchange rate fluctuations might have been unfavorably impacting the company’s top-line growth.
Lowered Fiscal 2020 Outlook
ADP has lowered its fiscal 2020 guidance. Revenues are now expected to register about 6% growth compared with the prior guided range of 6-7%. Adjusted effective tax rate is now estimated to be 23.2% compared with 23.3% guided earlier.
Employer Services revenues are now anticipated to register around 4% growth compared with the prior guided range of 4-5%. Employer Services new business bookings is now expected to register 6-7% growth compared with prior guided range of 6-8%.
PEO Services revenues are now anticipated to register 9-10% growth compared with the prior guided range of 9-11%. Average worksite employees are now expected to register 7-8% growth compared with prior guided range of 7-9%.
Rise in Expenditure
ADP continues to witness increase in expenses due to constant investment in acquisitions and transformation efforts. PEO Services benefits pass-through costs and selling expenses are also increasing. During the first six months of fiscal 2020, total expenses of $5.69 billion increased 4.2% year over year. Previously, ADP’s total expenses increased 3.7% year over year in fiscal 2019, 7.7% in fiscal 2018 and 6.2% in fiscal 2017.
Higher expenses are likely to keep the bottom line under pressure going forward.
ADP faces significant competition in each of its product lines. Both its Employer services and PEO services segments compete with other independent business outsourcing companies in most of their operating regions. Also, the company has seen some negative impact on its retention rate owing to increasing competition and migration from the legacy business. Moreover, the company faces significant regulatory risks in the United States as well as in the international markets.
Zacks Rank & Stocks to Consider
Currently, ADP carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the broader Zacks Business Services sector are Omnicom (OMC - Free Report) , TransUnion (TRU - Free Report) and Genpact (G - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Long-term expected EPS (three to five years) growth rate for Omnicom, TransUnion and Genpact is 5.6%, 12.8% and 13.9%, respectively.
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