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Why Is ADP (ADP) Up 4.6% Since Last Earnings Report?

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It has been about a month since the last earnings report for Automatic Data Processing (ADP - Free Report) . Shares have added about 4.6% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is ADP due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

ADP's Q4 Earnings Beat Estimates

Automatic Data Processing, Inc. has reported impressive fourth-quarter fiscal 2024 results, wherein both earnings and revenues surpassed the Zacks Consensus Estimate.

ADP’s earnings per share of $2.1 beat the consensus estimate by 1% and increased 10.6% from the year-ago quarter. Total revenues of $4.8 billion surpassed the consensus estimate by a slight margin and grew 6.5% from the year-ago quarter.

Segments

Employer Services’ revenues of $3.2 billion grew 7% on a reported basis and 7% at constant currency, meeting our estimate. Pays per control increased 2% from the year-ago quarter.

PEO Services’ revenues rose 6% from the year-ago quarter to $1.6 billion and surpassed our expectation of $1.5 billion for the fourth quarter of fiscal 2024. Average worksite employees paid by PEO Services were 729,000, growing 3% from the year-ago quarter.

Interest on funds held for clients rose 17% from the year-ago quarter to $227 million and missed our estimate of $257.9 million. ADP’s average client funds balance grew 4% to $36.1 billion. Average interest yield on client funds expanded 30 basis points to 3.1%.

Margins

Adjusted EBIT increased 9% on a year-over-year basis to $4.9 billion. The adjusted EBIT margin grew 70 basis points (bps) to 25.5%.

The margin of Employer Services increased 220 bps, while PEO Services declined 240 bps.

Balance Sheet and Cash Flow

ADP exited fourth-quarter fiscal 2024 with cash and cash equivalents of $2.9 billion compared with $3.3 billion reported at the end of the preceding quarter. The long-term debt of $3 billion was flat with the preceding quarter.

Automatic Data Processing generated $1.3 billion in cash from operating activities in the quarter.

FY25 Guidance

For fiscal 2025, ADP has reduced its guidance for revenue growth to 5-6% from the 6-7% mentioned previously. The adjusted EPS growth guidance is lowered to 8-10% from the 10-12% stated earlier. The adjusted effective tax rate is estimated to be 23%. The adjusted EBIT margin is updated to 60-80 bps from the 60-70 bps mentioned previously.

Automatic Data Processing has reduced its guidance for Employer Services revenue growth to 5-6% compared with the 7-8% mentioned previously. The guidance for PEO Services’ revenue growth is pegged at 4-6%, whereas it reported a rise of 3-4% in the preceding quarter.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month.

VGM Scores

At this time, ADP has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, ADP has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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