BofA Downgrades ADP, Sees Only 7% Upside Potential

The bullish case for Automatic Data Processing ADP can no longer be justified after the stock's notable outperformance versus the S&P 500 index over the past 18 months, according to Bank of America Merrill Lynch. 

The Analyst

Jason Kupferberg downgraded ADP from Buy to Neutral with an unchanged $175 price target.

The Thesis

ADP's stock over the past 18 months benefited from activist investor Pershing Square's involvement, while the company showed strong execution and margin expansion, Kupferberg said in a Wednesday downgrade note. (See his track record here.)

Pershing Square exited the stock, and the recent outperformance sets up a "higher implied bar" for performance that may already be priced into the stock, the analyst said. 

For example, ADD should be able to hit at least the midpoint of its fiscal 2021 adjusted EBIT margin target of 23.25% to 25.25%, but this level of expansion isn't as strong as what was seen in fiscal 2019, he said.

Also, management's three-year revenue growth CAGR guidance in June 2018 of 7% to 9% off 2018 numbers could be impacted by the unfavorable interest rate environment, lower-than-expected growth in the PEO business and foreign exchange fluctuations, Kupferberg. 

Now may be the "time for a breather," as BofA's unchanged $175 price target implies upside potential of just 7%, the sell-side firm said. 

Price Action

Shares of Automatic Data Processing were trading lower by 1.76% Wednesday afternoon at $161.43. 

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