Automatic Data Processing Slips On Earnings And Higher Guidance

Automatic Data Processing Quietly Reports Record Quarter 

We’ve been fans of the labor market, labor market stocks, and Automatic Data Processing (NASDAQ: ADP) for years. The group is supported by secular trends that promise years of sustained business if not robust growth. The pandemic put a hiccup in that outlook but most if not all of the labor-oriented business services companies including ADP have rebounded from their lows, returned or are about to return to YOY growth, and are emerging from the pandemic in better shape than before. A theme we’ve noticed within the group is that, while business per customer is down, the number of clients is up and that means leverage for both revenue and earnings as the economy builds momentum. 

ADP Reports Record Quarter, Guides Growth Higher 

Share of ADP fell in response to the FQ3 results not because they were bad but because they weren’t a blow-out. The market is on edge waiting for signs of the robust economic recovery we all know is brewing and the labor market data, including the labor market services companies, are one of the first places we’ll see them. That said, the $4.1 billion in revenue is up 1.5% from last and beat the consensus by 50 basis points. The revenue is not only growing on a YOY basis but this is the fourth sequential quarter of growth, revenue is at an all-time high, and the comp is against the previous all-time high. The labor market may not have fully recovered but ADP’s business sure has. 

The Employer Services or human-resources outsourcing segment was the weakest and down -1.0% YOY. This is offset by a 7.0% increase in the PEO or insurance services segment and indications the Employer Services segment is picking up. Total new business in the Employer Services segment is up 7.0% and points not only to accelerating business but increasing leverage as well. 

Moving down to the margins and earnings, the company’s margins shrank about 90 basis points from last year due to higher costs. The costs, however, are pegged to incentives and growth investments that should pay themselves back fairly quickly. This led to a slight decline in YOY earnings, about 2.0%, which was much less than expected. The GAAP $1.90 fell less than 1% from last year but beat consensus by $0.13 while the $1.89 adjusted fell 2/0% YOY and beat by $0.11.

Looking forward, we expect to see Automatic Data Processing revenue and earnings not only grow sequentially into the end of the year but for growth to outpace the newly updated guidance. The company says it’s now expecting new business to top 20% by the end of the year and drive a 2% to 3% increase in revenue. This puts the Q4 revenue guidance in the range of $3.77 billion or down 8% in a quarter that is not only historically strong but also one with the tailwind of economic reopening. 

Automatic Data Processing: A 2% Yield With A Fortress Balance Sheet

Automatic Data Processing is a near-perfect dividend-growth stock with only the flaw of high valuation to mar the story. Trading at nearly 28X its F2021 earrings the stock is no bargain but you get a lot for what you pay. The yield is hovering near 2.0% right now with ample liquidity, cash, cash flow, and free cash flow to back it up. The payout ratio is a little high so the robust dividend increases might not continue but we are expecting the 23rd consecutive increase to be announced at the end of the calendar year. 

The Technical Outlook: Bargain Hunters Buy Into ADP 

Shares of ADP fell hard in the wake of the report but only because the post-pandemic economic surge hasn’t started yet. When it does and we think it’ll be this quarter things will change. Until then, shares of ADP may continue to move lower with one caveat: price action is close to a very strong support level. The support level is consistent with the previous all-time high set just before the pandemic-driven market sell-off in March of 2020. This level should provide enough of a bounce to get shares moving sideways if not up again. If not then this stock isn’t what we think it is and that is a reopening winner.