Last week, you might have seen that Automatic Data Processing, Inc. (NASDAQ:ADP) released its second-quarter result to the market. The early response was not positive, with shares down 3.3% to US$171 in the past week. Automatic Data Processing reported US$3.7b in revenue, roughly in line with analyst forecasts, although statutory earnings per share (EPS) of US$1.50 beat expectations, being 4.4% higher than what analysts expected. Following the result, analysts have updated their earnings model, and it would be good to know whether they think there’s been a strong change in the company’s prospects, or if it’s business as usual. We’ve gathered the most recent statutory forecasts to see whether analysts have changed their earnings models, following these results.
Following the latest results, Automatic Data Processing’s 16 analysts are now forecasting revenues of US$14.9b in 2020. This would be a modest 2.8% improvement in sales compared to the last 12 months. Statutory earnings per share are expected to increase 7.5% to US$6.12. In the lead-up to this report, analysts had been modelling revenues of US$15.0b and earnings per share (EPS) of US$6.11 in 2020. The consensus analysts don’t seem to have seen anything in these results that would have changed their view on the business, given there’s been no major change to their estimates.
It will come as no surprise then, to learn that the consensus price target is largely unchanged at US$183. The consensus price target just an average of individual analyst targets, so – considering that the price target changed, it would be handy to see how wide the range of underlying estimates is. The most optimistic Automatic Data Processing analyst has a price target of US$212 per share, while the most pessimistic values it at US$134. These price targets show that analysts do have some differing views on the business, but the estimates do not vary enough to suggest to us that some are betting on wild success or utter failure.
Further, we can compare these estimates to past performance, and see how Automatic Data Processing forecasts compare to the wider market’s forecast performance. It’s pretty clear that analysts expect Automatic Data Processing’s revenue growth will slow down substantially, with revenues next year expected to grow 2.8%, compared to a historical growth rate of 6.5% over the past five years. By way of comparison, other companies in this market with analyst coverage, are forecast to grow their revenue at 11% per year. Factoring in the forecast slowdown in growth, it seems obvious that analysts still expect Automatic Data Processing to grow slower than the wider market.
The Bottom Line
The most important thing to take away is that there’s been no major change in sentiment, with analysts reconfirming that earnings per share are expected to continue performing in line with their prior expectations. Fortunately, analysts also reconfirmed their revenue estimates, suggesting sales are tracking in line with expectations – although our data does suggest that Automatic Data Processing’s revenues are expected to perform worse than the wider market. There was no real change to the consensus price target, suggesting that the intrinsic value of the business has not undergone any major changes with the latest estimates.
Even so, the longer term trajectory of the business is much more important for the value creation of shareholders. We have estimates – from multiple Automatic Data Processing analysts – going out to 2024, and you can see them free on our platform here.
You can also view our analysis of Automatic Data Processing’s balance sheet, and whether we think Automatic Data Processing is carrying too much debt, for free on our platform here.
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