J.P Morgan Remains Neutral On Automatic Data Processing Following Analyst Day

Last week J.P Morgan met with Automatic Data Processing ADP management in Boston. As expected, management did not provide a mid-quarter update, but maintained a positive tone consistent with the F1Q earnings call when ADP surprisingly raised its forecast one quarter into the fiscal year. All told, JPM believes ADP is executing well and benefiting from earlier investments despite the sluggish economy. While it thinks relative short-term upside is limited, the stock appears to be set up well going into C1H11 given easier compares and no change in the macro. It remains Neutral but still prefer ADP over PAYX. The CEO remains committed to hitting financial targets and set prudently conservative guidance at the beginning of the fiscal year but felt compelled to raise guidance given the strong start fueled by strong retention rates and pays per control and solid double-digit growth in small business new sales in F1Q. JPM believes ADP is targeting over 90% retention for FY11, consistent with its long-term average retention rate. While this suggests further upside from retention could be limited in FY12, there is a chance that retention could move even higher assuming service levels remain improved, complemented by pricing benefits. ADP closed Friday at $45.42