Automatic Data Processing Is Ready To Scale New Heights
2022.04.28 13:23
Automatic Data Processing Moves Higher On Strong Results
As great as the risks to the economy are right now, the results from Automatic Data Processing (NASDAQ:ADP) prove the labor market and business, in general, are doing OK.
The company not only reported a stronger than expected quarter, but was also able to guide the coming quarter higher. The stock may be highly valued at 32X its earnings, but that doesn’t seem to matter to the market.
The post-release price action is very bullish and points to at least a retest of the all-time highs, if not a new all-time high. Based on our view of the labor market and the leverage that Automatic Data Processing has gained over it, we see this trend continuing and driving share prices higher, at least in the near term.
Automatic Data Processing Beat, Raises Guidance
Automatic Data Processing had a great quarter driven by an increase in clients and workers per client. The company reported $4.5 billion in net revenue for a gain of 10% over last year and about 12% in the 2-year stack.
The revenue beat the Marketbeat.com consensus by 100 basis points as well and is driven by gains in both core operating segments. Employer Services, the largest segment, grew by 8% and is expected to see a 13% increase in new business for the year. The PEO segment grew by a stronger 14% and is supported by a 16% increase in on-site workers.
Moving down to the earnings, the company was able to leverage revenue growth and internal efficiencies to widen the adjusted EBIT margin by 50 basis points. This helped to drive a 15% increase in net earnings and a 16% increase in adjusted EPS.
On the bottom line, the $2.21 in adjusted EPS is $0.13 better than expected and margin strength is expected to continue. Turning to the guidance, the company upped the guidance for revenue growth to 9% to 10% versus the Marketbeat.com consensus of 8.59% and there is similar strength in the earnings outlook.
The Analysts May Cap Gains In Automatic Data Processing
The 12 analysts rating Automatic Data Processing have it pegged at a firm Hold with a price target that assumes the stock is fairly valued. With no analysis commentary out since the earnings release and a downtrending consensus target, we see this capping gains in the stock.
Price action may move higher in the near term, but it will reach a ceiling that may coincide with the high price target of $250. The $250 target is coincident with the current all-time high and a likely place to find resistance in a stock as highly valued as this.
We don’t see a major selloff developing any time soon but we do think this stock may be rangebound.
The Technical Outlook: Automatic Data Processing Confirms Trend
Price action in Automatic Data Processing surged nearly 5% in the wake of the earnings release and is confirming the trend. The bad news is that the trend is an uptrend within a range and there is a chance a new high will only result in a sell signal.
If price action can get above the current all-time high and hold the level it may continue to move higher. If not, we are expecting to see this stock move sideways within the range of $200 to $250 for the rest of the year at least.
ADP Stock Chart
