What Is ADP’s Fundamental Value Based On Expected 2019 Results?

by Trefis Team
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ADP (NYSE: ADP) has seen robust growth in the first two quarters of fiscal 2019, with the company beating market and Trefis expectations in both quarters. In Q2, the company reported revenues of $3.5 billion, an increase of 8% compared from the prior year quarter. In addition, the company’s diluted earnings per share grew 30% to $1.34 primarily due to strong revenue growth and EBIT margin expansion. ADP’s core strength lies in its strong business model, large client base and improving client retention ratio. The company has remained client-focused, and its drive to meet the evolving needs of the global human capital management market is delivering positive results that are also contributing to an improvement in retention, as well as a sustained acceleration in new business bookings.

ADP’s management raised its outlook for fiscal 2019 backed by strong growth expected across segments. The company expects revenue to improve 6-7%, while adjusted earnings are expected to see growth of 17-19%, up from the previous 15-17% outlook range. ADP also expects to achieve significant revenue growth in its international businesses, which saw solid double-digit growth in multinational offerings in Q2. We currently have a price estimate of $153 per share for ADP, which is similar to the current market price. We have summarized our full year expectations for ADP based on the company’s guidance and our own estimates, on our interactive dashboard ADP’s Fiscal 2019 outlook. You can modify any of our key drivers to gauge the impact changes would have on its valuation, and see all Trefis Technology company data here.

Key Factors That Are Likely to Impact ADP’s Financial Performance

PEO Services Will Continue To Drive Overall Growth

ADP’s revenue from its PEO services have grown at around 14.5% annually over the last five years. For Q2, revenues were up 12% year over year, primarily driven by a 9% increase in average worksite employees. ADP expects PEO revenue growth of 9-10% in fiscal year 2019, compared to a prior forecast of 8-9%, while average worksite employees are expected to grow in the 8-9% range. With the global market for HR outsourcing estimated to expand at a compound annual growth rate (CAGR) of around 12.7% between 2016 and 2020, this in turn will further provide a major boost to ADP’s PEO services growth.

Payroll Processing Will Remain The Biggest Contributor of ADP’s Revenues

While ADP’s PEO Services business has driven much of its top line growth in the last few years, payroll processing continues to be its core business – contributing approximately 66% of total revenues. In Q2, the company’s revenue from its payroll processing services increased by approximately 6% compared to the prior year quarter, while Employer Services’ new business bookings grew by 1 %. ADP expects Employer Services revenue growth of 5-6% in fiscal 2019, while its new business bookings are expected to grow in the 6-8% range. With an ever-growing customer base and a high retention rate of clients of over 90%, the company is in a strong position to generate sustained revenue growth in this segment.

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