On Tuesday, RBC Capital maintained a Sector Perform rating on Automatic Data Processing (NASDAQ:ADP) with a steady price target of $267.00. The firm forecasts an in-line quarter and anticipates guidance for fiscal year 2025 to indicate revenue growth between 4.5% and 5.5%, alongside 7% to 9% growth in earnings per share (EPS).
The analysis projects a 5% to 6% growth in Employer Services (ES) with approximately 1% growth in pays per control. However, there is an expected decline in retention by 70 to 50 basis points and a mid-single-digit growth in bookings. Professional Employer Organization (PEO) services are predicted to grow by 4% to 6%, fueled by 3% to 4% growth in average worksite employees (WSE) and 7% to 10% growth in Client Funds Investment (CFI) driven by an estimated 2% growth in average Client Funds Balance and approximately 3.1% yield. This yield comes despite anticipated interest rate cuts.
Despite the forecast of increased investments, RBC Capital expects Automatic Data Processing to achieve an EBIT margin expansion of 20 to 40 basis points. This outlook follows the results from Paychex (NASDAQ:PAYX), Inc. and includes considerations of a potential slowdown in employment and small business formation, as well as a lengthier sales cycle.
In other recent news, ADP has been in the spotlight for its strong financial performance in the third quarter of fiscal 2024, marked by a 7% increase in revenue and a 14% growth in adjusted diluted earnings per share (EPS). This robust performance has led the company to revise its full-year outlook, expecting higher Employer Services (ES) retention and margin, and increased client funds interest revenue due to rising interest rates.
In another development, TD Cowen maintained a Hold rating on ADP shares, albeit with a slight reduction in the stock price target from $253 to $251. This adjustment took into account an increase in float revenue for ADP, balanced by a reduced expectation for margin expansion in the future.
The firm's analysts noted ADP's effective execution during the quarter and its ability to deliver a solid performance despite a challenging market environment. However, they expressed caution about the sustainability of float-driven outperformance and the potential for a slowdown in labor market growth.
ADP's revised outlook anticipates a 2% growth for the year, at the upper end of the previous 1% to 2% projection. The company also expects an effective tax rate of approximately 23% and an adjusted EPS growth of 10% to 12% for fiscal '24.
InvestingPro Insights
As RBC Capital weighs in on Automatic Data Processing's (ADP) performance, insights from InvestingPro provide additional context for investors. ADP, a stalwart in the Professional Services industry, has showcased its commitment to shareholders by raising its dividend for an impressive 51 consecutive years. This track record of dividend reliability is complemented by the company's moderate level of debt, which supports a stable financial outlook. Moreover, analysts remain optimistic about ADP's profitability, expecting the company to maintain its profitable streak this year.
InvestingPro data highlights ADP's substantial market capitalization of $96.46 billion, underscoring its significant presence in the market. The company's P/E ratio stands at 26.2, which, when paired with its PEG ratio of 1.82, may suggest a higher valuation relative to near-term earnings growth. Revenue growth has been steady, with a 7.08% increase over the last twelve months as of Q3 2024, reinforcing the company's robust operational performance.
For investors looking to delve deeper into ADP's financials and future prospects, additional InvestingPro Tips are available, which can be accessed with the special coupon code PRONEWS24 for up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription. With 10 more InvestingPro Tips to explore, investors can gain a comprehensive understanding of ADP's potential and make informed decisions.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.