Highly-Valued Automatic Data Processing Falls To New Lows
Automatic Data Processing (NYSE: ADP) is a very good company in a growing industry. Not only is it on track for growth but it has a strong balance sheet, is buying back shares, and has a healthy dividend that is itself expected to grow. The problem for the stock now, however, is that it is a very highly valued stock for what you get and that has it set up for profit-taking and correction. Trading at 32X earnings it is trading well above the broad market average with only its dividend to sustain the value. The dividend yields 1.90% with shares trading at their new low which is still well above the market average but not enough, it looks like, to get shares moving higher.
The institutions may also be playing a part. The institutional activity over the past year has been vigorous and net-bullish on balance but there has been a change of trend. While the institutions have bought a net $1.61 billion worth of shares over the last year, about 2.0% of the market cap with shares at $200, the balance of activity swung in favor of the bears in Q4 2021 and that trend is holding true so far in 2022. Total institutional activity has been light but selling is outpacing buying at a rate of 2.5:1 on a dollar for dollar basis. Insider activity has been net-bearish as well but total holdings are less than 0.35% compared to the 78.35% held by the institutions.
Automatic Data Processing Falls On New Guidance
Automatic Data Processing had a great fiscal Q2 and guided the outlook for the year higher with only one issue. The guidance for earnings, while strong, is barely above the consensus and suggests margin pressure is building. Regardless, the $4.0 billion in net revenue is up 9.0% on top of last year’s 0.71% gain as momentum within the labor builds.
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One of the themes of the pandemic for ADP and many other employment services businesses is that the client count grew while the number of employees per client declined. This resulted in a net contraction of business but one that was not as deep or long as first expected and set the company up for leverage during the reopening. The company is reporting high retention rates as well as growing employee counts and that is driving the business to new highs.
On the bottom line, the company reported a slight improvement in the margin that helped to drive earnings. The adjusted $1.65 not only grew 9.0% from last year but beat the consensus estimate by $0.02 as well. Looking forward, the company is expecting the strength to continue and up the guidance range for revenue by 100 basis points to 8% to 9% with a 50 to 75 basis point improvement in the margin. This compares to the 7.3% consensus estimate but there is a problem with the earnings. The problem for the market is that earnings are expected in a range of up 12% to 14% versus the 12.45% consensus estimate which is light relative to the revenue. In our view, both the revenue and earnings guidance is cautious given the momentum we see in the economy.
The Technical Outlook: Capitulation In Automatic Data Processing
Shares of ADP have been pulling back for the last few weeks and are now down another 7.5% in the wake of the earnings report. With so little to support the move, we can chalk it up to profit-taking and a near-term downtrend that appears to have the bulls in capitulation. Now it looks like price action may fall as low as $196 but we would expect to see bottom-seekers and bargain-hunters start buying at this level. Longer-term, it may take a little while for the market to come back but we see this stock retesting the recent highs within the next 4 to 6 quarters if not sooner.
Experience
Thomas Hughes has been a contributing writer for InsiderTrades.com since 2019.
Areas of Expertise
Technical analysis, the S&P 500; retail, consumer, consumer staples, dividends, high-yield, small caps, technology, economic data, oil, cryptocurrencies
Education
Associate of Arts in Culinary Technology
Past Experience
Market watcher, trader and investor for numerous websites. Founded Passive Market Intelligence LLC to provide market research insights.
