Why is ADP (ADP) down 0.5% since the last earnings report?

A month has passed since the last earnings report for Automatic Data Processing (ADP). Shares lost about 0.5% in that time, underperforming the S&P 500.

Will the recent negative trend continue until the next earnings release, or is ADP due for a breakout? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the company’s most recent earnings report in order to better understand the important catalysts.

ADP’s third-quarter earnings beat estimates

Automatic Data Processing, Inc. announced impressive third-quarter fiscal 2024 results, in which both earnings and revenues exceeded the Zacks Consensus Estimate.

ADP earnings per share of $2.9 beat the consensus estimate by 4.4% and increased 14.3% from the year-ago quarter. Total revenues of $5.3 billion slightly exceeded consensus and increased 6.6% from the year-ago quarter on a reported basis and 6% on an organic basis in constant currency.

Segments

Employer Services revenues of $3.6 billion increased 8% on a reported basis and 7% on a constant basis, in line with our estimates. Inspection wages increased by 2% compared to the previous year’s quarter.

PEO Services revenue increased 5% from the year-ago quarter to $1.7 billion and exceeded our estimate of $1.6 billion for the fourth quarter of fiscal 2023. PEO Services’ average on-site employee compensation was $732,000 , which means an increase of 3% compared to the previous year’s quarter.

Interest on funds held for customers increased 29% from the prior-year quarter to $321 million and exceeded our estimate of $255.8 million. ADP’s average client funds increased 6% to $41.7 billion. The average yield on client funds increased by 50 basis points to 3.1%.

Margins

Adjusted EBIT increased 12% from the year-ago quarter to $1.5 billion. Adjusted EBIT margin increased 140 basis points (bps) to 29.3%.

Employer Services margin increased by 230 bps, while PEO Services decreased by 220 bps.

Balance sheet and cash flow

ADP ended the third quarter of fiscal 2024 with cash and cash equivalents of $3.3 billion, compared to $1.6 billion in the fourth quarter of fiscal 2023. Long-term debt of $3 billion was unchanged from amounts from the previous quarter.

Automatic data processing generated $1.5 billion in operating cash during the quarter. Capital expenditure was $1.9 million.

Guidelines 2024

In 2024, ADP expects revenue growth of 6-7%. Adjusted EPS is expected to grow 10-12%. The adjusted effective tax rate is estimated at 23%. Adjusted EBIT margin is expected to expand by 60-70 bps.

Automatic data processing predicts that revenues from Employer Services will increase by 7-8%, while revenues from PEO services will increase by 3-4%.

How have estimates changed since then?

It turns out that the estimate review has been trending downward over the past month.

VGM results

Right now, ADP has an average growth score of C, a rating with the same score on the dynamics front. Following exactly the same trajectory, the stock is rated C for Value, ranking in the middle 20% for this investment strategy.

Overall, the stock has a Total VGM Score of C. If you’re not focused on one strategy, this score should interest you.

Perspectives

Estimates for this company are generally on a downward trend, and the magnitude of these revisions indicates a downward shift. Notably, ADP carries a Zacks Rank #3 (Hold). We expect a linear rate of return on the stock over the next few months.

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