Automatic Data Processing, Inc. Holding Its Own Vs. The High-Flying Indices

Automatic Data Processing, Inc. ADP may not be leading the market higher, but it certainly is doing its best to keep up with the lead pack.

When investors watch a long-distance race of any kind, after the initial rush out of the gates the upper echelon starts to separate themselves from the masses -– typically with a couple of leaders and then a pack of strong contenders and then a big gap until the rest of the field starts to straggle along well afterward.

Right now, Automatic Data Processing may not be leading the race, but at least they are in that pack of contenders -– not bad for a non-tech/biotech/social media firm. What does this strength say about the economy, and where is the stock headed from here?

ADP A Reflection Of Economic And Business Trends

ADP has been a part of that list from the beginning, as it has shown the propensity to lead the market in terms of the timing of its macro directional moves. Also, intuitively ADP is a good gauge for what small- to mid-sized businesses are doing in terms of expansion or contraction of their workforces.

What The Bulls Are Seeing In ADP Right Now…

The bullish crowd surrounding ADP currently is latching on to the fact that the stock is showing very good technical strength currently and has thus far shown no signs of any kind of turnaround in the near future. 

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Fundamentally, the bulls would point out ADP's reasonable valuation on a price-to-sales basis (ADP comes in at 3.29 on that metric), decent operating cash flow and nothing troublesome on their balance sheet. Obviously, if economic conditions improve, there is a very strong likelihood that ADP will be a beneficiary with more headcount on their customers' payrolls.

What The Bears Are Seeing In ADP…

The bears in ADP stock are quick to point out that aside from the cheap price-to-sales number, the rest of the company's valuation metrics come in on the expensive side of neutral –- at best. Their price-to-book ratio is 6.01, the PE ratio is more than 20 based on next year's consensus EPS estimates, and that is compared to revenue growth in the low single digits and estimated EPS growth just above 10 percent.

They would also point out that while the company enjoys fairly benign balance sheet and cash flow figures, they are in a very competitive space, not only with Paychex as a key competitor, but also all of the local and regional players where any slippage on their part can easily see their numbers dwindle.

Technically, there is not much for the bears to grasp onto –- outside of the stock being modestly overbought in the short-term.

What Do The Charts Tell Us About ADP?

Technicians say that ADP is likely to continue higher as long as the market does as well. At some point, both the market as well as ADP will pull back.

The technicians are saying a pullback in ADP's stock will take the price down to around $81.69 in the best case or possibly down to around $79.81, both levels representing uptrend line support. They note that the maximum upside projection for ADP on this move should be around $85.54.

Overall…

ADP appears to have a little room left to the upside in the short-term, but the stock may be in store for a healthy, needed pullback to one of the two uptrend line support levels noted above.

Again, this is very much the same type of read that could be assigned to the broader market. The good news for the stock, and the market, is that once the pullbacks run their course, higher prices (as in new all-time highs) should follow.