Automatic Data (ADP) Q4 Earnings: Will It Surprise This Time?

Automatic Data Processing, Inc. (NASDAQ:ADP) is set to report fourth-quarter fiscal 2016 results on Jul 28. Last quarter, it had posted a negative earnings surprise of 0.85%. The company has posted an average negative earnings surprise of 0.40% over the past four quarters.

Let’s see how things are shaping up for this announcement.

AUTOMATIC DATA Price and EPS Surprise

Factors to Consider

Automatic Data Processing holds a dominant position in the payroll processing and human capital management market, primarily due to its robust product portfolio. The company continues to frequently upgrade its existing product portfolio as well as launch new products. We believe that the company’s higher revenue per client, strong customer retention ratio and lower cost of operations also place it in an advantageous position.

Automatic Data Processing’s TotalSource and Analytics divisions are also showing strength and the trend is likely to continue. In addition, the company is divesting its non-core assets to focus more on its primary business.

However, the company has been seeing some negative impact on its retention rate owing to the migration from the legacy business and increasing competition in the sphere. To overcome this to an extent, the company has been ramping up its resources in the service-and-support division in tune with growing demand. While we expect the company’s continuous investments in these new initiatives to drive growth over the long term, it will weigh on near-term earnings.

In addition, a volatile macroeconomic environment, strengthening U.S. dollar and increasing competition are the other near-term headwinds.

Earnings Whispers

Our proven model does not conclusively show that Automatic Data Processing will beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Automatic Data Processing has an Earnings ESP of 0.00% as both the Most Accurate and the Zacks Consensus Estimate stand at 67 cents.

Zacks Rank: Automatic Data Processing has a Zacks Rank #3. Though Zacks Rank #1, 2 or 3 increases the predictive power of ESP, the company’s ESP of 0.00% makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Stocks to Consider

Here are a few stocks that, as per our model, have the right combination of elements to post an earnings beat this quarter:

Innoviva, Inc. (NASDAQ:INVA) with an Earnings ESP of +25.00% and a Zacks Rank #1.

GoDaddy Inc. (NYSE:GDDY) with an Earnings ESP of +50.00% and a Zacks Rank #3.

Expedia Inc. (NASDAQ:EXPE) with an Earnings ESP of +6.82% and a Zacks Rank #3.