HCM Dominance & PEO Revenues To Drive ADP's Q2 Earnings

Automatic Data Processing Inc (NASDAQ:ADP) is set to release second-quarter 2018 results on Nov 31.

Notably, ADP has a positive record of earnings surprises in three of the trailing four quarters, with an average beat of 4.5%. In the last quarter, ADP delivered a positive earnings surprise of 7.1%.

ADP reported first-quarter fiscal 2018 adjusted earnings of 91 cents per share, which beat the Zacks Consensus Estimate by a nickel. The figure increased 5.8% from the year-ago quarter.

Moreover, revenues of $3.08 billion surpassed the Zacks Consensus Estimate of $3.06 billion and grew 5.6% on a year-over-year basis.

Based on impressive first-quarter results, ADP raised fiscal 2018 guidance for revenues and earnings. The company anticipates fiscal 2018 revenue growth in the range of 6-8%, up from previous guidance of 5-6%. The Global Cash Card acquisition and the impacts from foreign currency translation are anticipated to add approximately one percentage point of growth to revenues.

ADP expects adjusted earnings to grow in the range of 5-7%, up from 2-4%.

Notably, the stock has returned 22.6% year over year, substantially outperforming the 15.1% rally of the industry.

What to Expect?

The Zacks Consensus Estimate for earnings is pegged at 89 cents for the current quarter, reflecting a year-over-year increase of 2.3%. Further, Zacks Consensus Estimate for revenues is pegged at $3.18 billion, up roughly 6.4% from the year-ago quarter.

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

Factors Likely to Impact Q2 Results

The first U.S. labor market data of 2018 has hit the tape, with the ADP private sector payroll read for December reaching 250K new jobs. This is well beyond the analysts were expectation of 195K. November’s tally was revised down, but only a tad: -5K to 185K. Notably, the employment environment remains consistently strong.

Last quarter, PEO Services revenues increased 14% year over year to $903.6 million. Average worksite employees paid by PEO Services increased 10% to almost 484,000.

For the PEO Services segment, management anticipates fiscal 2018 revenue growth of 11-13% and margin expansion of 25-50 bps. The Zacks consensus estimate for the PEO Services segment is $925 million.

We note that ADP holds a dominant position in the payroll processing and human capital management (“HCM”) market, primarily owing to robust product portfolio. Moreover, with recent acquisition of WorkMarket, the company will be able to integrate human capital management tools with WorkMarket’s contingent workers platform, consequently enhancing its offerings.

Nevertheless, we expect investments in new initiatives to continue to weigh on the company’s bottom-line results. Moreover, rising unemployment levels will negatively impact the company. Further, increasing competition is a major headwind.

What Our Model Says

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. The sell-rated stocks (Zacks Rank #4 or 5) are best avoided. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

ADP carries a Zacks Rank #3 and its Earnings ESP is +0.11%.

Other Stocks With Favorable Combination

Here are a couple of companies which, as per our model, have the right combination of elements to post an earnings beat this quarter:

BofI Holding, Inc. (NASDAQ:BOFI) , with an Earnings ESP of +5.79% and a Zacks Rank of 1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Ally Financial Inc. (NYSE:ALLY) , with an Earnings ESP of +1.27% and a Zacks Rank of 1.

CDK Global, Inc. (NASDAQ:CDK) , with an Earnings ESP of +2.01% and a Zacks Rank of 3.

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