ADP (NASDAQ:ADP) is expected to publish its Q2 FY’23 earnings on January 25, reporting on a period that saw the U.S. job market remain reasonably strong. We expect ADP’s revenue for the quarter to come in at about $4.4 billion, marking an increase of almost 10% year-over-year, and marginally ahead of the consensus estimate of $4.37 billion. We project that earnings will stand at about $1.95 per share, compared to a consensus estimate of $1.93. So what are some of the trends that are likely to drive the company’s results? See our interactive dashboard analysis on ADP Earnings Preview for more details on how ADP revenues and earnings are likely to trend for the quarter.
Although there have been some macro headwinds of late, with U.S. inflation remaining quite high and the Federal Reserve continuing with its rate hikes, ADP’s business has held up quite well as the labor market remained strong. Over Q1 FY’23, ADP posted a stronger-than-expected set of results with revenues rising almost 10% year-over-year driven by strong new business bookings, worksite employee growth, and higher revenue via client funds interest. These trends should hold up through Q2 FY’23 as well. For perspective, over the month of December, U.S. nonfarm payrolls rose by 223,000 for the month, ahead of estimates, with the unemployment rate coming in better than expected at 3.5%, marking a decline of 0.2%. Wages were also up 4.6% versus last year. This should result in an expanding base of clients and continued strong demand for ADP’s services. ADP has also done a good job of managing its margins so far, despite the inflationary environment. For example over Q1, adjusted operating margins rose 30 basis points to 24.1%. Moreover, the company has projected an adjusted EBIT margin expansion of between 125 to 150 basis points for FY’23.
However, we remain neutral on ADP stock with a $237 price estimate, which is roughly in line with the current market price. There is a relatively strong probability that the U.S. will enter a recession in the near term and this could impact growth rates for players like ADP. ADP stock also trades at a relatively high multiple of about 30 consensuses FY’23 earnings. Although this is justified by the company’s relatively predictable earnings growth, the high valuation might prove a risk for the stock through an economic downcycle. See our analysis of ADP valuation for more details on what’s driving our price estimate for ADP stock.
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