A Look At ADP After The Proxy Battle

Bill Ackman's proxy battle against Automatic Data Processing ADP didn't end well for the activist investor. In fact, in the company's CEO Carlos Rodriguez's own words, shareholders delivered an "ass-whipping" decision to renominate all 10 directors while Ackman received less than 20 percent of votes.

The Analyst

Morgan Stanley's Danyal Hussain resumed coverage of ADP's stock with an Equal-weight rating and $114 price target.

The Thesis

ADP's management team and board may have been "validated" by the proxy battle results, but at the same time Ackman's activist campaign brought three new "psychological elements" investors should be aware of, Hussain said. (See Hussain's track record here.)

They are:

Management's desire to "prove shareholders right" and maintain their confidence and support.
Exiting a hard-fought activist campaign and proxy battle could have created a new sense of unity — one that could be leveraged to "expedite" new products and strategies.
Executives and board members that were singled out by Ackman are likely very eager to "prove critics wrong."

Ackman's activist campaign also "put a spotlight" on concerns that haven't gone away following the proxy vote, including the "potential for losing share upmarket without a preeminent product," the analyst said.

ADP's new "sharpened focus" coupled with ongoing concerns of market share loss implies the stock is "fairly valued" at current multiples, Hussain said.

ADP is already trading at a premium forward P/E multiple of 28x versus its five-year average of 24x.