Analyst Applauds Automatic Data Processing's Strong Fundamentals, But Keeps An Eye On Macro Headwinds

RBC Capital Markets analyst Ashish Sabadra initiated coverage on Automatic Data Processing Inc ADP at Sector Perform with a price target of $267

The analyst notes the company is gaining market share and has a diversified revenue portfolio, with a range of products serving businesses of all sizes. 

Sabadra cites the company's broad suite of applications powered by a strong platform, improved user experience, and strong retention ratio as positives.

The analyst sees a solid labor market environment but notes macro headwinds weighing employment (pays per control), new business formation, and customer spending.

Notably, Sabadra sees a slowdown in pays-per-control, projecting 1%-2% for FY24 (vs. ~5% in FY23), curbing Employer Services revenue growth.

On the other hand, the analyst expects strong competition in HCM solutions, Global Solutions, and HRO Solutions, lower Employer Services retention for FY24, normalizing pricing (but still above prepandemic levels), and PEO slowdown to ~4% in 4Q23 from 15% growth in FY22.

The analyst estimates revenue and adjusted EPS of $19.141 billion and $9.22 for FY24 and $20.602 billion and $10.27 for FY25. 

Also ReadADP Touts 'Incredibly' Strong Business Bookings, Sets Optimistic Outlook for 2024

Price Action: ADP shares are trading lower by 0.89% at $253.49 on the last check Tuesday.

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