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Automatic Data Processing (ADP) Rides on Buyouts, Debt Ails

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·4 min read
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Automatic Data Processing, Inc.ADP shares have had a solid run on the bourses over the past year. The stock has appreciated 8.3% over the past year, outperforming 6% growth of the industry it belongs to and 3.2% decline of the Zacks S&P 500 composite.

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The company recently reported better-than-expected third-quarter fiscal 2022 results. Adjusted earnings per share of $2.21 beat the Zacks Consensus Estimate by 6.8% and grew 16.9% year over year. Total revenues of $4.51 billion beat the consensus mark by 1.2% and improved 10% year over year on a reported basis and 11% on an organic constant-currency basis.

How is Automatic Data Processing Doing?

ADP’s top line looks solid on the back of strength across all the segments — Employer Services, PEO Services and Interest on funds held for clients. While higher revenues continue to aid operating margins, the effect of increased expenses related to selling, implementation and service, and higher PEO pass-through expenses act as headwinds.

The raised fiscal 2022 guidance is another notable tailwind. Revenues are now expected to register 9-10% growth compared with the prior-expected growth rate of 8-9%. Adjusted EPS is now expected to register 15-17% growth compared with the prior-expected growth rate of 12-14%. The company now expects Employer Services revenues to grow at a rate of about 7% compared with the prior expected growth rate of about 6%, and PEO Services revenues to grow at a rate of 14-15% compared with the prior growth rate of 13% to 15%.

ADP continues to enjoy a dominant position in the human capital management market through strategic buyouts like Celergo, WorkMarket, Global Cash Card and The Marcus Buckingham Company. It has a strong business model, high recurring revenues, good margins, robust client retention and low capital expenditure. Further, it continues to innovate, improve operations and invest in its ongoing transformation efforts.

ADP’s cash and cash equivalent balance of $1.63 billion at the end of third-quarter fiscal 2022 was well below the long-term debt of $2.99 billion. Further, the company’s current ratio (a measure of liquidity) at the end of the reported quarter was pegged at 1.01, lower than the current ratio of 1.04 reported at the end of second-quarter fiscal 2022 and the prior-year quarter’s 1.05. Decreasing current ratio is not desirable, as it indicates that the company may have problems meeting its short-term debt obligations.

Zacks Rank and Other Stocks to Consider

ADP currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some other stocks in the broader Business Services sector that investors can consider are Cross Country Healthcare CCRN, Gartner IT and Clean Harbors CLH. Cross Country Healthcare and Gartner sport a Zacks Rank #1 while Clean Harbors carries a Zack Rank #2.

Cross Country Healthcare has an expected earnings growth rate of 49.4% for the current year. It has a trailing four-quarter earnings surprise of 29.2%, on average.

Cross Country Healthcare has a long-term earnings growth of 6.9%.

Gartner’s shares have surged 11.8% in the past year. The company delivered a trailing four-quarter earnings surprise of 24.2%, on average.

The Zacks Consensus Estimate for Gartner's earnings in the current year has moved up 9.8% in the past 90 days.

Clean Harbors has an expected earnings growth rate of 26.2% for the current year. The company has a trailing four-quarter earnings surprise of 35.8%, on average.

The Zacks Consensus Estimate for Clean Harbors’ earnings in the current year has moved up 30% in the past 90 days.


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Automatic Data Processing, Inc. (ADP) : Free Stock Analysis Report

Gartner, Inc. (IT) : Free Stock Analysis Report

Clean Harbors, Inc. (CLH) : Free Stock Analysis Report

Cross Country Healthcare, Inc. (CCRN) : Free Stock Analysis Report

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