What To Expect From ADP’s Q1 Results?

Payroll and HR solutions player ADP (NASDAQ:ADP) is expected to publish its Q1 FY’25 results on October 30, 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 $2.22 per share, marginally ahead of consensus estimates, while revenues are likely to grow about 6% year-over-year to $4.78 billion. So what are some trends likely to drive the company’s earnings for the quarter? See our analysis of ADP Earnings Preview for a closer look at what to expect.

ADP’s business has grown quite well in recent quarters as the labor market remained strong. ADP posted a stronger-than-expected set of Q4 FY’24 results (ended June 2024). While revenue beat expectations, coming in at $4.8 billion, marking a growth of 6% versus last year, adjusted earnings stood at $2.09 per share. Growth was driven by strong demand for the company’s human capital management and HR outsourcing services and robust retention rates. Average worksite employees paid by professional employer organization (PEO) services increased 3% over the previous quarter to about 742,000.  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 17% to $277 million in Q4. These trends should likely hold up through Q1 FY’25, as well. For perspective, employers in the U.S. added 254,000 jobs in September 2024, beating expectations. This could indicate that employers remain reasonably positive about the broader economic outlook, potentially driving up demand for ADP services.

The increase in ADP stock over the last 4-year period has been far from consistent and has largely been as volatile as the S&P 500. Returns for the stock were 43% in 2021, -1% in 2022, and 0% in 2023.
In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is less volatile. And it 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 around rate cuts and multiple wars, 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 $270 price estimate, which is about 7% below the current market price. ADP stock trades at a relatively high multiple of about 29x consensuses FY’25 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. See our analysis of ADP valuation for more details on what’s driving our price estimate for ADP stock.

[1] Returns as of 10/26/2024
[2] Cumulative total returns since the end of 2016

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