Will Automatic Data Processing (ADP) Miss Earnings? - Analyst Blog

Automatic Data Processing, Inc. ADP is set to report third quarter fiscal 2014 results on Apr 30. Last quarter, it posted a 1.30% positive surprise. We note that ADP has outperformed the Zacks Consensus Estimate in the preceding four quarters with an average positive surprise of 0.90%.

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

Growth Factors this Past Quarter

ADP is expected to perform better on the back of improved execution and higher client retention. Moreover, recovery in the job market will help the company.

Moreover, the 100% tax-free spin-off of its Dealer Services business into an independent publicly traded company will help ADP to focus more on its core Human Capital Management (HCM) business, going forward. This spin-off will provide nearabout $700.0 million, which the company would use up in share buybacks. This aggressive share buyback will boost profitability going forward.

However, volatile macroeconomic environment and increasing competition from Paychex Inc. PAYX, Insperity Inc. NSP and Equifax Inc EFX are the near-term headwinds.

Earnings Whispers?

Our proven model does not conclusively show that ADP is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP: That is because the Most Accurate estimate stands at $1.08 which coincides with the Zacks Consensus Estimate. Hence, the difference is of 0.0%.

Zacks Rank #3 (Hold): ADP's Zacks Rank #3 when combined with a 0.00% ESP makes surprise prediction difficult.

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