ADP Rises On Labor Market Strength
I have long been a fan of labor market stocks and the pandemic has done nothing to change that,. While employment down is from its peak the market is still quite strong relatively speaking. Not only has the post-shut-down rebound in hiring been strong, but intentions for new hires is at an all-time record.
Along with this, the wage gains among the working have risen substantially above the YOY figures and there is no indication this will end. Data from the manufacturing, shipping, and packaging industries all point to a sustained rebound with or without added stimulus and that can be seen in Automatic Data Processing (NASDAQ:ADP) 3rd quarter results.
ADP Reports Business Rebounds To Pre-COVID levels
ADP surprised the market with how strong it’s 3Q actually was. The company reports that employment among many of its clients is still down on a YOY basis but new business is filling the gap. On the top-line, the company reported $3.5 billion in revenue which is flat on a YOY basis and 700 basis points better than the consensus.
Moving down, the company’s cost-conscious operations and COVID-related transformation initiatives drove a 120 basis point increase in margins. The increase in margin can be seen in the bottom-line results which beat consensus on both a GAAP and a non-GAAP basis. The GAAP EPS grew 4.0% YOY to $1.40 to beat by $0.44 while adjusted EPS beat its targets by a slightly wider margin.
“Our first-quarter results significantly exceeded our expectations across the board, which was a result of outstanding execution through a period where employment levels among our clients still showed high single-digit declines compared to last year,” said Kathleen Winters, Chief Financial Officer, ADP. “We are encouraged by the strong start to the year for our new business bookings, and continue to manage costs prudently. While we still expect to face headwinds over the course of the year, we will continue to look for ways to drive strong performance in both the near and long-term.”
On a segment basis, the quarter was more mixed but still strong. The Employment Services segment saw its revenue fall 3% while PEO Services revenue grew 4%. As for new bookings, new bookings increase 2.0% for the quarter to set a new fiscal 1st quarter record. Looking forward, the company expects the gradual improvements in employment to continue and has raised its guidance in accordance. The company now expects 2021 revenue in a range of -1.0% to 1.0% and EPS slightly lower.
ADP Is A Prince of Dividend Payers
While ADP’s results are solid and point to a decent year in fiscal 2021 this stock’s allure lay in its 2.5% dividend. With 45 years of consecutive annual dividend increases under its belt, there is a high expectation of future increases. If the company is consistent with history it will announce the next increase in November and it could be a big one. The 5-year CAGR is running near 15% and the balance sheet gives no reason to expect anything else. Regarding the balance sheet, the company is well-capitalized, has very little debt, incredibly high coverage and low leverage ratios, and oodles of free-cash-flow.
The Technical Outlook: Looking Bullish, But How High Will ADP Go?
Shares of ADP popped more than 7.0% intraday and look very bullish. The caveat is that resistance has been strong on an intraday basis and may keep this stock from moving higher, at least for now. Resistance is at the $160 level where prices were repelled over the summer. If this level confirms as resistance price action may fall back to support before moving higher. If not, if price action can break above resistance shares of ADP may hit $180 by the end of the year.
