Hold Automatic Data Processing (ADP)
ADP reported strong first-quarter EPS but slightly weaker-than-expected revenue yesterday, and the stock has declined over 5%. As noted in yesterday’s regular update, ADP’s EPS rose 12%, twice as much as expected, to $1.31, beating estimates by eight cents. However, while revenue rose 4.9% year-over-year, to $3.41 billion, it fell slightly shy of estimates.
This is ADP’s second quarter in a row beating profit estimates by a wide margin despite a revenue shortfall. With the hump of Obamacare compliance behind it, the payroll processor is having trouble signing new customers. Management has maintained earnings growth by improving margins and increasing revenue per customer, but Wall Street clearly wants to see customer growth as well.
The stock is still well above support at 95—so far, this pullback is smaller than February’s—but this latest drop is a second red flag in a row. ADP remains a Hold, but our opinion has deteriorated somewhat, and we’ll try to use the next rally to reduce our position.