Having Already Dropped 16% This Year, Could ADP’s Stock Drop Further To Pre-2018 Levels?

by Trefis Team
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Having already declined ~18% since the beginning of this year, at the current price of around $140 per share, we believe ADP (NASDAQ: ADP) could see further downside.
Why is that? The key is ADP’s stock is still up around 25% since the beginning of 2018, a little over 2 years ago.
Our dashboard Why Automatic Data Processing Stock moved 24.8% provides the key numbers behind our thinking, and we explain more below.

Some of this rise of the last 2 years is justified by the roughly 15% growth seen in ADP’s revenues from 2017 to 2019, which combined with a 12% growth in net margins, translated into a 28% growth in Net Income (earnings margin rose steadily in 2018 and 2019). This, combined with a 3% drop in share count, led to a further 32% growth in earnings, on a per share basis.

Finally, ADP’s P/E ratio rose steadily from about 28x at the end of 2017 to 32x at the end of 2019. While ADP’s P/E is already down to about 26x now, given the volatility of the current situation, there is significant additional possible downside for ADP’s stock price when compared to levels seen in the past years – $112 at the end of 2017, and $127 as recent as in late 2018.

So what’s the likely trigger and timing to this downside?

The global spread of Coronavirus has meant there could be a drop in new client additions for ADP, as companies might refrain from outsourcing payroll processing and HR services. In addition, the economic slump could see a drop in ADP’s revenue per client employee. We believe ADP’s Q3 results in May will confirm the hit to its revenue. It is also likely to accompany a lower Q4 as well as 2020 guidance.

If there isn’t a clear evidence of containment of the virus at the time of the earnings announcement, we believe the stock will see its P/E decline from the current level of 26x to 22x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $112.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.
Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a more complete macro picture, and complements our analyses of Coronavirus impact on a diverse set of companies. The complete set of coronavirus impact and timing analyses is available here.

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