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ADP (ADP) Up 1.6% Since Last Earnings Report: Can It Continue?

Zacks Equity Research
W.W. Grainger (GWW) doesn't possess the right combination of the two key ingredients for a likely earnings beat in its upcoming report. Get prepared with the key expectations.

It has been about a month since the last earnings report for Automatic Data Processing (ADP). Shares have added about 1.6% 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 drivers.

ADP Q3 Earnings Beat Estimates, Revenues Lag

ADP's third-quarter fiscal 2019 EPS of $1.77 beat the Zacks Consensus Estimate by 8 cents and improved year over year. Total revenues of $3.85 billion missed the consensus mark by $56 million but improved year over year.

Segment in Details

Employer Services revenues of $2.72 billion increased 3% 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 3.1%. New business bookings increased 10% in the reported quarter. PEO Services revenues were up 6% year over year to $1.13 billion. Average worksite employees paid by PEO Services were 554,000, up 8% from the prior-year quarter. Interest on funds held for clients in the third-quarter fiscal 2019 increased 24% to $167 million. The company’s average client funds balance climbed 4% year over year to $30 billion. Average interest yield on client funds was 2.2%, up 30 basis points (bps) on a year-over-year basis.

Margins

Adjusted EBIT came in at $1.01 billion, up 10% on a year-over-year basis. Adjusted EBIT margin rose to 26.3% from 25% in the year-ago quarter. Adjusted EBIT margin benefited from continued execution of transformation initiatives and operating leverage. Segment-wise, Employer Services segment’s margin increased 230 bps on a year-over-year basis. The same for PEO Services segment decreased 10 bps in the quarter.

Balance Sheet and Cash Flow

ADP exited third-quarter fiscal 2019 with cash and cash equivalents of $1.83 billion compared with $2.79 billion in the prior quarter. Long-term debt of $2.00 billion remained flat sequentially. The company generated $1.02 billion of net cash from operating activities in the reported quarter. Capital expenditures were $40.3 million. The company paid dividends worth $344.6 million and repurchased shares worth $234 million.

Fiscal 2019 Outlook

ADP raised its fiscal 2019 guidance for adjusted earnings and adjusted EBIT margin growth while reaffirming the same for revenue growth. In fiscal 2019, revenues are expected to register 6-7% growth.

Adjusted earnings per share are expected to register 19-20% growth compared with 17-19% growth guided earlier. The company expects adjusted EBIT margin growth of 150 basis points (bps) compared with 125 to 150 bps guided earlier. Adjusted effective tax rate is anticipated around 23.8% compared with 24.4% guided earlier.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, ADP has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, ADP has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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