ADP Stock Headed Below $100 For The First Time Since 2017?

Despite a 20% decline in ADP stock (NASDAQ: ADP) since the beginning of this year, owing to the spread of the novel Coronavirus that has rattled the stock markets and the broader economy, at the current price of $135 per share, we believe ADP could drop further if there are no signs of abatement of the crisis by June 2020. The key is ADP stock is still up more than 20% since the beginning of 2018, a little over 2 years ago. We estimate that ADP’s stock price could decline to levels of around $94 (worst-case scenario) if ADP revenue falls by 25% vs. FY’19, its margins contract by 15% to about 13.7% in 2020 (as it continues paying its staff along with incurring other fixed expenses), and its valuation multiple, which is already at a multi-year low, rises ~10% to 28x. Below, we summarize this possible downside case for ADP, which is detailed in our interactive dashboard analysis Automatic Data Processing Downside: How Low Can Automatic Data Processing Stock Go?

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

• The global spread of coronavirus has led to slowdown in industrial and economic activity, thus affecting company hiring activities. Most companies have frozen hiring activities, and many are aggressively laying off employees. Also, in a bid to cut expenses, companies are likely to internalize HR and payroll processing activities. This will lead to a drop in demand for ADP’s services across these segments. We believe ADP’s Q4 results in August will confirm the hit to its revenue.
• Specifically, we believe the full-year revenue expectations formed by the market may be closer to $10.6 billion, about 25% lower than its 2019 revenue of $14.2 billion, and 20% lower than the 2018 revenue of $13.3 billion.
• The market has seen this coming, and ADP’s P/E multiple has already shrunk from around 32x to ~25x. We believe ADP’s P/E multiple could recover slightly to 28x, but even that might not be enough to stop the stock from slipping lower.
• The 25% reduction in revenues will not accompany a proportional drop in expenses, as compensation expenses and other fixed costs are likely to fall by a smaller percentage. This will likely result in the net income margin shrinking from 16.1% in 2019 to about 13.7% in 2020.
• This, in turn, would translate into a stock price drop of about 40%, close to $94.

Will such a drop be justified? Absolutely not. However, investors who are first out the door in a panic selling situation take a smaller hit to their portfolio.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

We do believe these trends are likely to reverse in later quarters of 2020, and as the Coronavirus crisis is tamed during late Q2, higher revenue and earnings expectations will replace the dire scenarios that are easily imagined during difficult times.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. It complements our analyses of the coronavirus outbreak’s impact on a diverse set of companies. The complete set of coronavirus impact and timing analyses is available here.

Further, to see how the COVID-19 crisis could affect ADP’s HR outsourcing peer Paychex, view our interactive dashboard Paychex Downside: How Low Can Paychex Stock Go?

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams