ADP Vs. Paychex: Bank Of America Changes Its Preference

Citing the underperformance of Automatic Data Processing ADP relative to Paychex, Inc. PAYX over the past three months, and the prospects for a sharper acceleration in ADP's P&L growth for fiscal year 2018 and beyond, Bank of America Merrill Lynch said it prefers ADP over Paychex.

The Analyst

BofA Merrill Lynch analyst Jason Kupferberg upgraded ADP from Neutral to Buy and raised the price target from $116 to $131. The analyst maintained a Buy on Paychex and upped the price target from $68 to $73.

The Thesis

Give the year-over-year comps and an anticipated ramp in sales force productivity, analyst Kupferberg said he expects the past quarter to be the trough in revenue and bookings growth for ADP. (See Kupferberg's track record here.) 

Operating margins are likely to expand in the second half of the fiscal year following anticipated declines in the first half, as top-line growth re-accelerates and workforce optimization costs abate, Kupferberg said.

The company's guidance for fiscal 2019 and 2020 suggests continuation of the acceleration trend beyond the current fiscal year, the analyst said.

If the U.S. tax reform is enacted in calendar 2019, BofA Merrill Lynch expects ADP to earn $5.67 per share that year — 19 percent higher than its current estimate. ADP's dividend would increase about 35 percent, pushing up the dividend yield from 2 percent to 3 percent, if all the earnings per share upside is used for dividend payouts, according to BofA. 

Kupferberg raised the earnings per share estimates for fiscal 2019 and 2020 from $4.36 and $4.95, respectively, to $4.44 and $5.11, on the basis of ADP's ability to hit its 2019 and 2020 operating margin targets.

Pershing Square's continued involvement in the stock will provide management with the incentive to hit financial targets, according to BofA. 

The Price Action

Shares of both ADP and Paychex are up over 12 percent for the year-to-date period.

At the time of writing, ADP was advancing 0.92 percent to $115.87, and Paychex was adding 1.06 percent to $68.33.

Related Links:

Here's What Likely Drew Bill Ackman To Invest In ADP

Paychex Upgraded, And 2 Things That Would Further Increase Morgan Stanley's Constructive View

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