Down 11% This Year, ADP Stock To Fall Further?

by Trefis Team
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ADP stock (NASDAQ: ADP) is down around 11% since the beginning of this year, and at the current price of around $150 per share, we believe ADP stock has a significant downside.

Why is that? Our belief stems from the fact that ADP’s stock remains about 35% higher than the low seen in early 2018. Our dashboard What Factors Drove 34% Change In Automatic Data Processing Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

Some of this rise over the past 2 years is justified by the roughly 15% growth seen in ADP’s revenues, which translated into a further 28% growth in Net Income, largely due to a lower effective tax rate (31.6% in 2017 vs 23.6% in 2019). This combined with a 3% drop in outstanding share count (total share buybacks of almost $2 billion) led to a 32% growth in earnings on a per share basis.

Finally, ADP’s P/E ratio rose from about 28x at the end of 2017 to 32x at the end of 2019. While ADP’s P/E has dropped to 29x now, given the volatility of the current situation, there is additional possible downside for ADP’s multiple when compared to levels seen in the past years – P/E of 25x at the end of 2016.

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

The global spread of Coronavirus, and the resulting lock downs and quarantine means that a lot of businesses are struggling, and many will want to cut costs drastically. Due to this, ADP will find it difficult to acquire new clients, and it’s likely that some of their existing clients might also want to shift HR and payroll processing activities in-house, instead of outsourcing. We believe ADP’s Q4 results in July will confirm the hit to its revenue. It is also likely to accompany a lower 1H-2021 guidance.

If there isn’t 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 29x to around 25x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $120.

While ADP stock doesn’t seem to have much near term upside, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

For more insights into how Covid-19 has impacted ADP’s HR and payrolls peer Paychex, view our interactive dashboard 2008 vs. 2020 Crisis Comparison: How Did Paychex Stock Fare During Coronavirus Crisis Compared to S&P 500?.

Our dashboard forecasting U.S. 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 complete macro picture.
The complete set of coronavirus impact and timing analyses is available here.

 

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