Automatic Data Processing (ADP) Q2 Earnings Top, Revenues Lag

Automatic Data Processing, Inc. ADP 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.

Shares of ADP have gained 28.6% over the past year, outperforming the 27.7% growth of the industry it belongs to.

 

Let’s check out the numbers in detail.

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%.

Zacks Rank & Stocks to Consider

Currently, ADP carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the broader Zacks Business Services sector are Waste Management WM, S&P Global SPGI and Fidelity National Information Services FIS, 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 earnings (three to five years) growth rate for Waste Management, S&P Global and Fidelity National Information Services is estimated at 8.2%, 10% and 8.9%, respectively.

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