What To Expect From ADP’s Q4 Earnings?

Payroll and HR solutions player ADP (NASDAQ:ADP) is expected to publish its Q4 FY’24 results on July 31, reporting on a period that saw the U.S. job market remain relatively strong. We expect earnings for the quarter to come in at about $2.07 per share, marginally ahead of consensus estimates, while revenues are likely to grow about 6% year-over-year to $4.75 billion. So what are some of the trends that are likely to drive the company’s earnings for the quarter? See our analysis of ADP Earnings Preview for a closer look.

ADP’s business has held up quite well in recent quarters as the labor market remained strong. ADP posted a stronger-than-expected set of Q3 FY’24 results (ended March 2024), with revenues rising by 7% year-over-year to $5.3 billion, while adjusted earnings rose by 14% year-over-year to $2.88 per share. Growth was driven by strong demand for the company’s human capital management and HR outsourcing services and robust retention rates. ADP’s U.S. clients, on average, added about 2% more employees to their payrolls compared to the same period in the previous year. ADP has also been earning higher interest income on client funds due to the high interest rate environment. Interest on funds held for clients increased 29% to $321 million in Q3. These trends should likely hold up through Q4 FY’24, as well. For perspective, employers in the U.S. added 206,000 jobs in June 2024, meeting expectations. This compares to 272,000 jobs added in May and 175,000 jobs in April. This could indicate that employers remain reasonably positive about the broader economic outlook, potentially driving up demand for ADP services.

ADP stock has shown strong gains of 40% from levels of $175 in early January 2021 to around $245 now, vs. an increase of about 45% for the S&P 500 over this roughly 3-year period.
However, the increase in ADP stock has been far from consistent. Returns for the stock were 40% in 2021, -3% in 2022, and -2% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that ADP underperformed the S&P in 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the industrial sector including GE, CAT, and UNP, and even for the mega-cap stars GOOG, TSLA, and MSFT.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could ADP face a similar situation as it did in 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

We remain neutral on ADP stock with a $252 price estimate, which is roughly in line with the current market price. ADP stock trades at a relatively high multiple of about 27x consensuses FY’24 earnings. Although this is justified by the company’s relatively predictable earnings and stable dividend, the high valuation might prove a risk for the stock through a potential economic down cycle. Small and medium-sized businesses are more dependent on consumer spending and there could be some concerns on this front, as consumer spending growth in the U.S. slows with GDP growth also easing. Moreover, the unemployment rate in the U.S. has also seen a bit of an uptick coming in at 4.1% in June, its highest level since 2020, and has risen over each of the last three months. This could also impact the company’s performance down the line. See our analysis of ADP valuation for more details on what’s driving our price estimate for ADP stock.

[1] Returns as of 7/20/2024
[2] Cumulative total returns since the end of 2016

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