Automatic Data Processing (NASDAQ:ADP) is expected to publish its Q3 FY’23 earnings on April 26, 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 $4.9 billion, marking an increase of about 9% year-over-year, and marginally ahead of the consensus estimate of $4.88 billion. We project that earnings will stand at about $2.47 per share, compared to a consensus estimate of $2.45. 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.
ADP’s business has held up quite well as the labor market remained strong. For example, over the most recent quarter – Q2 FY’23 – earnings were stronger than expected, with revenues rising almost 9% to $4.4 billion and adjusted diluted EPS standing at $1.96. Growth was driven by strong new business bookings, worksite employee growth, and higher revenue via client funds interest. These trends should hold up through Q3 FY’23 as well. For perspective, over the month of March, U.S. nonfarm payrolls rose by 236,000 for the month, with the unemployment rate holding steady at 3.5%. Growth is being driven by sectors including leisure and hospitality, professional, government and business services, and health care. 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 Q2, the adjusted operating margin rose 120 basis points to 24.3%.
We remain positive on ADP stock with a $239 price estimate, about 11% ahead of the current market price. Although ADP stock also trades at a relatively high multiple of about 27x consensuses FY’23 earnings, this is justified by the company’s relatively predictable earnings growth. Sales are projected to grow by about 8% this year, per consensus estimates, while EPS is projected to grow by over 15%. See our analysis of ADP valuation for more details on what’s driving our price estimate for ADP stock.
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