Recent Selloff In Automatic Data Processing Creates Buying Opportunity

Shares of Automatic Data Processing ADP fell 7 percent year-to-date and slipped 6 percent Wednesday after the company reported strong second quarter earnings results but cut revenue and bookings guidance. Argus sees this recent weakness as a buying opportunity.

The bullish thesis of Argus on ADP is based on:

• Consistent low double-digit EPS growth, driven by jobs growth and regulatory changes.
• Cloud-based Human Capital Management (HCM) services to customers.
• One of the strongest balance sheets in U.S. business.
• Raised payout for 42 consecutive years; Dividend currently yields about 2.2 percent.

That said, ADP slashed its full-year currency-neutral revenue growth to 6 percent from 7-9 percent and now expects zero growth in bookings, a far cry from the company’s target range of 8-10 percent.

The company blamed uncertainty surrounding government policies post-election that resulted clients delaying their spending.

“Recent uncertainty over the scope of government regulation changes has led to a sell-off in the shares. We see that as a buying opportunity,” analyst John Eade wrote in a note.

Despite expecting slower sales and margin growth in the second half of the year, Eade maintained his FY2017 EPS estimate of $3.66. The analyst also reaffirmed his preliminary FY2018 EPS estimate of $4.08.

“[W]e think ADP is in a good spot to help corporations navigate change, once the changes have been established,” Eade added.

Eade rates ADP shares Buy, with a price target of $118.

At last check, shares of ADP rose 1.83 percent to $96.99.