Automatic Data Processing, Inc. (ADP): New Analyst Report from Zacks Equity Research - Zacks Equity Research Report - Adams Natural Res FD (NYSE:PEO), Automatic Data Processing (NASDAQ:ADP)

Summary:

Automatic Data Processing reported better-than-expected fourth-quarter 2014 results. Earnings per share were in line with the Zacks Consensus Estimate, while revenues beat the same. The company provided positive guidance for fiscal 2015. However, guidance is back-end loaded, as margin and profitability are expected to improve in the second half due to higher expenses in the first. This will remain an overhang on the stock, in our view. Nevertheless, we believe that the Dealer Services spin-off will help the company focus more on its relatively fast growing human capital management business. ADP is expected to perform better on the back of improved execution and higher client retention. Moreover, recovery in the job market is expected to help the company. Aggressive share buybacks and higher dividends are shareholder friendly, in our view. However, volatile macroeconomic environment, sales force execution risk and credit rating downgrades are the headwinds. Thus, we prefer to remain Neutral on the stock and set a price target of $88.00.

Overview:

Founded in 1949, New Jersey based-Automatic Data Processing, Inc. ADP is one of the world's leading providers of human capital management solutions and integrated computing solutions to vehicle dealers. It serves approximately 637K clients across 125 nations.

ADP reported revenues of $12.21 billion in fiscal 2014. The company reports in three business segments Employer Services, Professional Employer Organization PEO Services and Dealer Services.

The Employer Services segment includes human resource information, payroll processing, human resources tax and compliance management, and benefit administration products and services.

The Professional Employer Organization PEO Services segment provides small and medium-sized businesses with employment administration outsourcing solutions, including payroll, payroll tax filing, HR guidance, 401(k) plan administration, benefits administration, compliance services, health and workers' compensation coverage, and other supplemental benefits for the employees.

The Dealer Services segment provides integrated dealer management systems, digital marketing solutions and other business management solutions to the automotive, heavy truck, motorcycle, marine, recreational vehicle (RV), and heavy equipment retailers, distributors, and manufacturers.

In April 2014, the company announced its plan to separate the Dealer Services business into an independently traded public company through a 100% tax-free spin-off. The company recently announced Sep 30 as the date for the spin-off and renamed the segment as CDK Global. ADP expects to receive at least $700.0 million on account of the spin-off, which it expects to use fully for share repurchases.

Following the spin-off, ADP intends to increase its annual dividend payout gradually so that it can achieve its pre-separation div-payout ratio target of 55% to 60% over a period of two years.

On a geographical basis, the U.S, Europe, Canada and others contributed 81%, 11.4%, 3.6% and 4%, respectively, of the revenues in fiscal 2014.

ADP faces significant competition from its peer group that includes the likes of Paychex Inc, Insperity Inc and Intuit Inc.

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