ADP Earnings Will Give Us A Peek At US Employment Trends

+1.07%
Upside
230
Market
233
Trefis
ADP: Automatic Data Processing logo
ADP
Automatic Data Processing

Automatic Data Processing (NYSE:ADP) is set to release Q4 and fiscal year 2012 earnings on August 1. The company has reported an y-o-y increase in revenues for four straight quarters, posting Q3 revenue growth of 6% to $2.28 billion. ADP primarily provides payroll processing services and competes with other payroll processors such as Paychex (NASDAQ: PAYX). We expect that employment growth will be slow in the coming months but are looking to small business growth as a driver of growth for the company.

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Since ADP’s primary business involves payroll processing, its revenues are are dependent on new business and employment growth in the United States. This correlation with employment will probably hurt ADP’s revenue growth going forward as Chairman Ben Bernanke expects US economic growth to slow and unemployment rate to stay more or less stable. We believe that it is highly probable that a slowdown in the US, along with the slowdowns in Europe and China, will decrease consumer demand and consequently decrease employment. [1]

We currently estimate that the number of employees per ADP’s national payroll accounts will increase to approximately 2,200 by the end of our forecast period, but if the current global economic issues depress employment growth and employment stays relatively flat we estimate a 2% downside to our price estimate. You can assess the impact that a decrease in the average number of employees per national account would have on our ADP’s value by using our tool below:

An aspect of the business we will be closely watching is small business client growth. Small businesses added 93,000 jobs to their payrolls in during the month of June, and we expect them to be the primary provider of job growth going forward. [2] To take advantage of these trends, ADP has partnered with Xero to specifically target small businesses. If the product is successful and small business continue to be major employers in the US economy, we could see additional upside to our price estimate. You can assess the impact that average employee per small business client has on ADP’s value by using our tool below:

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We currently have a $59.96 price estimate for ADP, which is approximately 5% above the current market price.

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Notes:
  1. Jobless Claims In U.S. Decrease, Extending July Volatility, Bloomberg []
  2. ADP Employment Report, ADP []