Should You Sell ADP Stock Post Earnings?

The shares of Automatic Data Processing (NASDAQ: ADP) are currently trading at 20% above pre-Covid levels – gaining almost $15 billion in market capitalization despite a slow economic recovery. Investors have been optimistic on the stock by rewarding the expanding top-line and stable margins, but the unemployment rate of 4.8% in September 2021 remains higher than the 3.5% observed in February 2020. Notably, the unemployment rate will reach pre-pandemic levels as economic activity improves and restrictions on education, hospitality, and travel sectors are further eased. As highlighted in our previous article, ADP Stock Looks Fairly Priced, the stock’s valuation multiple (P/E) is slightly higher than historical figures – indicating the possible vulnerability to a correction. We highlight the historical trends in revenues, earnings, and stock price in an interactive dashboard analysis on ADP Valuation.

Long-term trends and operational metrics

ADP’s two operating segments, Employer Services and Professional Employer Organization, contribute 70% and 30% of total revenues, respectively. Employer Services segment provides human capital management products including payroll, workforce management, benefits distribution, etc., and the PEO segment provides similar services to clients when an employee working for a client is co-employed by ADP (known as a worksite employee). The company’s top line observed an annual growth of 5% from $11.6 billion in 2016 to $15 billion in 2021. Notably, the growth rate for the PEO segment has been much stronger at 9% p.a. (per annum) compared to Employer Services’ 2% p.a. in the last five years. Moreover, the company’s client base and worksite employees have increased by 8% and 7% p.a., respectively, since 2016. Per recent filings, the company’s revenues are likely to grow by 7-8% in FY2022 with expectations of strong numbers by the PEO segment.

How did ADP perform in FY 2021?

Assisted by new business bookings over the latter half of the year, ADP’s top line expanded by 3% (y-o-y) to $15 billion in FY2021. The net margins also improved by 0.4% leading to a 5% growth in net earnings. The company expects FY2022 operating margin to improve by 50 bps with a 9-11% growth in diluted EPS.

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