ADP (ADP) Down 10% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Automatic Data Processing (ADP). Shares have lost about 10% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is ADP due for a breakout? 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.

Automatic Data Processing Q2 Earnings Top Estimates

Automatic Data Processing reported mixed second-quarter fiscal 2020 results, wherein the company’s earnings surpassed the Zacks Consensus Estimate but revenues missed the same.

Adjusted earnings per share of $1.52 beat the consensus mark by 4.8% and improved 13.4% year over year. Total revenues of $3.67 billion marginally missed the consensus mark of $3.68 billion but improved 5% year over year on a reported basis and 6% on a constant-currency basis.

Segments in Detail

Employer Services revenues of $2.54 billion increased 4% year over year on a reported as well as constant-currency basis. Pays per control rose 2.2% year over year. New business bookings increased 3%. PEO Services revenues were up 9% year over year to $1.13 billion. Average worksite employees paid by PEO Services were 579,000, up 6% from the prior-year quarter. Interest on funds held for clients increased 7% to $138 million. The company’s average client funds balances climbed 6% year over year to $25.1 billion. Average interest yield on client funds was 2.2%, flat year over year.

Margins

Adjusted EBIT came in at $853.7 million, up 9% on a year-over-year basis. Adjusted EBIT margin rose 70 basis points from the year-ago quarter to 23.3%. Adjusted EBIT margin benefited from continued execution of transformation initiatives and operating efficiencies, which were partially offset by incremental sales and marketing, amortization, and PEO pass-through expenses.

Balance Sheet and Cash Flow

ADP exited the second quarter with cash and cash equivalents of $1.5 billion compared with $1.4 billion in the prior quarter. Long-term debt at the end of the quarter was $1 billion. The company generated $698.1 million of cash from operating activities in the quarter. Capital expenditures were $43.9 million. The company paid out dividends worth $342.7 million and repurchased shares worth $305.4 million.

Fiscal 2020 Outlook

ADP expects revenues to register about 6% growth. Adjusted earnings per share are anticipated to register 12-14% growth. The company expects adjusted EBIT margin growth of 100-125 basis points. Adjusted effective tax rate is anticipated to be 23.2%.

How Have Estimates Been Moving Since Then?

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

VGM Scores

At this time, ADP has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% 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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