Is The Street Underestimating ADP? Goldman Upgrades

The Street is underestimating margin expansion at Automatic Data Processing ADP, a Goldman Sachs analyst said Monday. 

The Analyst

Goldman Sachs analyst James Schneider upgraded shares of ADP from Neutral to Buy and upped his 12-month price target from $110 to $135. 

The Thesis

Bookings are likely to improve in 2018, and client retention will surprise to the upside as ADP completes its SaaS platform transition, Schneider said in a note. (See Schneider's track record here.) 

New cost initiatives ADP has undertaken are likely to drive margin upside in 2018 and beyond, the analyst said. 

ADP is an outsized beneficiary of lower corporate tax rates and higher interest rates in the TMT sector, according to Goldman. The firm models a 14-percent earnings per share boost from a lower corporate tax rate and a 6-percent potential boost from higher interest rates.

ADP shares have lagged their peers, adding 13 percent compared to the S&P 500's 18-percent gain and the payments group's 30-percent jump, setting the shares up well for 2018, Schneider said. It's due in part to a lack of earnings per share upside, he said. 

Goldman expects this scenario to reverse as fundamental and policy catalysts play out.

The Price Action

ADP shares are up close to 14 percent year-to-date.

At last check, shares were gaining 1.51 percent to $117.77.<

Related Links:

A Look At ADP After The Proxy Battle

Bill Ackman On How To Improve ADP: 'There Is A Lot Of Hand-Holding'