Will ADP Stock Provide A Strong Fiscal Year 2022 Guidance?

[Updated 07/26/2021]

Last quarter, Automatic Data Processing (NASDAQ: ADP) raised its new business bookings growth figures for the year assisted by improving employment numbers and declining coronavirus cases. Per the recent Bureau of Labor Statistics (BLS) report, 850,000 jobs were added in June 2021, but the unemployment rate remained fairly stable at 5.9%. In April 2020, the unemployment rate reached 14.7% with 20.5 million job losses. Given the ongoing vaccination drive and re-opening of the economy, re-hiring in the hospitality sector is a boon for payroll processing firms. The fourth-quarter revenues and earnings are expected to expand by 8.8% (y-o-y) and 1% (y-o-y), respectively. However, Trefis believes that the recent uptick in Covid-19 cases due to new variants is likely to remain a drag on ADP’s annual guidance figures. We highlight the quarterly trends in revenues, earnings, stock price, and expectations for Q4 FY2021 in an interactive dashboard analysis, ADP Earnings Preview.

[Updated 06/24/2021] – ADP Stock Looks Overvalued

The shares of ADP (NASDAQ: ADP) have gained 9% since the pre-Covid levels observed in February 2020, assisted by stable revenues and margins during the pandemic. The company offers cloud-based human capital management (HCM) solutions including payroll processing, talent management, and employee benefit functions to enterprises. The domestic and international businesses contribute around 85% and 15% of total revenues, respectively. Given the ongoing fall in the U.S. unemployment rate, the company’s revenues and earnings are likely to grow at a low single-digit rate this fiscal year. In the previous fiscal year, ADP processed $2.2 trillion of U.S. payroll and taxes, for nearly one  in six U.S. workers, on behalf of its clients. Our interactive dashboard on ADP Valuation highlights the historical trends in revenues, earnings, and valuation multiple along with the expectations for the next fiscal.

The company has been reporting stable growth in recent years

ADP’s revenues have observed an 18% growth from $12.3 billion in 2017 to $14.6 billion in 2020, driven by a rising client base and the number of worksite employees. Moreover, the company’s margins improved by 2-percentage points from 14.5% in 2017 to 16.9% in 2020 – assisting a double-digit growth in earnings and dividend per share. For FY2021, the revenues are likely to expand by 2% with a slight improvement in net margin, assisting single-digit growth in earnings per share. Considering an implied valuation multiple of 30x from our detailed valuation model, we believe that the stock’s fair price is $185.

Industry Outlook

In the recent release, the Bureau of Labor Statistics (BLS) reported that 559,000 jobs were added in May 2021 and the unemployment rate fell to 5.8%. Comparing to prior year statistics (before the pandemic), there are 7.6 million fewer jobs in the U.S. economy with hospitality, education, and public sectors affected the most. Notably, there are 2.5 million, 1 million, 0.8 million job losses in the hospitality, education, and public sectors, respectively. Significant job gains occurred in the leisure and hospitality industry in May (almost 52% of the total increase) with food services and drinking places registering the most. The government’s multiple relief packages along with the ongoing vaccination drive is likely to augment job growth across industries.

Do ADP’s peers offer better gains? ADP Stock Comparison With Peers summarizes how ADP compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.

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