Nothing Wrong With ADP’s Business

ADP Breaks Out To New High 

ADP NASDAQ: ADP gives evidence that the phrase “headwinds within the economy” has a different meaning from business to business. While the bulk of S&P 500 companies are exposed to shipping, freight, and materials costs business services companies like ADP are not. At the same time, while ADP may be struggling with employment or facing rising labor costs, those same factors are being experienced by virtually every business in operation today and driving positive results for the company. Its technology-based solutions help businesses manage their employees and services from human resources to financial are in demand. 

“This strong start to fiscal year 2022 reflects improving demand across all of our offerings as more employers partner with ADP for their HCM solutions," said Carlos Rodriguez, President and Chief Executive Officer, ADP. "With strong outcomes in bookings, revenue retention, pays per control, and worksite employee growth, we are excited about our prospects for this fiscal year and beyond."

ADP Beats Consensus, Raises Guidance For 2022

ADP posted $3.83 billion in consolidated revenue for the fiscal Q1 period setting a quarterly record. The gains are driven by strength in all end markets and supported by robust hiring trends over the past year. The revenue is also up 10% on an organic basis and beat the Marketbeat.com consensus estimate by 200 basis points. The beat is evidence of operational leverage gained over the past 15 months, while the number of employees fell during the peak of the pandemic the number of businesses using ADP increased. This has the company set up to continue growing above the pre-pandemic level as employment levels (hopefully) normalize. 

On a segment basis, both the Employer Services and PEO segment saw growth with the PEO segment outpacing at 15% versus 8%. In both cases, the company was able to leverage its revenue strength and widen its margin. Adjusted EBIT margin widened by 140 basis points to 23.92% to help drive a 17% increase in adjusted earnings. At the bottom line, the company’s $1.65 in GAAP earnings is up 16% over last year and beat the consensus by $0.16. 

Looking forward, the company is expecting revenue strength to continue and is guiding higher because of it. The good news here is that revenue gains are real and not driven by price increase like with so many other company’s today. As for the guidance, the company increased its outlook for bookings, retention, onsite-employee count, revenue, margin and earnings. ADP execs are expecting adjusted EPS in the range of up 11% to 13% versus the 10.15% expected by the analysts and we see upside risk in the numbers. Nearly 10 million unemployed Americans fell off the unemployment rolls in September, surely some of them went and got jobs when the benefits ran out. 

The Technical Outlook: ADP Signals Continuation 

Shares of ADP gained more than 2.0% following the release of calendar Q3 earnings and will probably move higher. The move has price action breaking out to a new all-time high and the technical indicators are bullish. Stochastic is pegged at the top of its range which suggests an overbought condition but that is something to expect in a bull market; overbought conditions can persist indefinitely. The MACD is more telling with its convergent peaks and extreme size, two indications of underlying market strength. In our view, price action is on its way up to the $240 level in the near term and may move much higher over the long.