ADP Earnings: Stock Down Despite Strong Performance

+4.18%
Upside
242
Market
252
Trefis
ADP: Automatic Data Processing logo
ADP
Automatic Data Processing

Automatic Data Processing’s (NASDAQ:ADP) stock dipped 2.7% as the human capital management company missed on fourth quarter revenue and earnings expectations, despite reporting strong growth. Its top line grew as a result of double digit growth in new business bookings, tempered by foreign exchange fluctuations. The company reported a 5% increase in revenues, to reach $2.7 billion, missing by $40 million. [1] Its diluted earnings per share from continuing operations increased 15% to $0.55, compared to expectations of $0.59.

See our complete analysis of ADP here

Stock Declines As Guidance Not Up To Expectations

Relevant Articles
  1. Will ADP’s Strong Gains Of Recent Years Continue?
  2. What To Expect From ADP’s Q4 Results?
  3. What To Expect From ADP’s Q3 Results?
  4. With The Job Market Holding Up, What To Expect From ADP’s Q2 Earnings?
  5. Forecast Of The Day: ADP Number of Clients Served
  6. Company Of The Day: ADP

Not only did the company miss the quarter’s expectations, but its guidance for the next fiscal also came in lower than expected. On its earnings call, ADP announced its expectations of a 12-14% increase in fiscal 2016 earnings per share, implying $3.24-3.29, short of market expectations of $3.31. [1] However, its revenue guidance was in line with market estimates.

For its segments, ADP forecasts its Employer Services revenue to grow 5-6%, including the negative impact of foreign currency translation. The company expects its PEO services revenue to grow 15-17%. Interest on funds held for clients will likely increase by $5-15 million based on anticipated growth in average client funds balances of 3-5% and expected average interest yield of 1.7%.

New Business Bookings Grow On HCM Service Demand

The rising demand for human capital management services helped increase ADP’s new business bookings by 18% in the fourth quarter, despite tough comparables from the same quarter of the previous fiscal year. [1] The new business bookings helped drive Employer Services revenue up by 2%, which was tempered by strong unfavorable foreign currency translation. New business bookings also helped increase ADP’s average client fund balances by 4% year-on-year.

We believe that ADP is likely to see continued growth in business bookings, given that the global HR Outsourcing industry is expected to grow at an average rate of 12.3% through 2018 as more and more companies outsource their HR functions. [2]

Pays Per Control Higher On Strong U.S. Job Environment

According to the Employment Situation Summary released by the U.S. Bureau of Labor Statistics (BLS), job additions for the month of April totaled 223,000, compared to market expectations of 224,000 job additions. [3] Despite the miss, experts were pleased with April job additions as it marked a significant turnaround from the poor showing in March, when only 85,000 jobs were added.

The unemployment rate in the U.S. increased marginally from 5.4% in April to 5.5% in May. In May, the U.S. economy added 280,000 jobs, against expectations of 225,000 job additions. In June, 223,000 jobs were added, which was slightly below expectations. However, the unemployment rate dipped to 5.3%. These factors helped drive 3% growth in ADP’s pays per control, which indicates the average number of employees ADP serves for a client. [1]

The Insured Unemployment Rate (IUR) represents the portion of the labor force that is eligible to receive unemployment insurance. It is considered to be a leading indicator of unemployment conditions in the U.S. When the number of people claiming unemployment benefits rises, the IUR also increases, following which the unemployment rate also rises. The seasonally adjusted IUR had been declining consistently since 2008 and has reached the pre-recession rate of 1.7%. [4] This bodes well for the job environment and companies like ADP, since their number of pays per control will likely improve further.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

Notes:
  1. ADP Reports Fourth Quarter and Fiscal 2015 Results; Provides Fiscal 2016 Forecast, July 30, 2015, ADP’s News Release [] [] [] []
  2. Global Human Resource Outsourcing Market 2014-2018, August 18, 2014, www.prnewswire.com []
  3. Employment Situation Summary, www.bls.gov []
  4. Unemployment Insurance Weekly Claims, July 30, 2015, U.S. Department of Labor News Release []