Cloud-based human capital management (HCM) solutions provider Automatic Data Processing, Inc. (ADP), which is headquartered in Roseland, N.J., operates in two segments—Employer Services and Professional Employer Organization (PEO). ADP’s shares gained 40% in price in 2021, outperforming the broader S&P 500’s 27.2% gains. The stock is currently trading above its 50-day and 200-day moving average. ADP hit its 52-week high of $248.96 on Dec. 29. However, the stock has slumped 2.1% in price over the past five days to close yesterday’s trading session at $241.39.

The company has benefitted from investors’ optimism about the stock due to the company’s stable margins and the labor market’s recovery last year. ADP reported better than expected results in its most recent quarter. Its revenues came in at $3.83 billion, versus the $3.75 billion consensus estimate, while its EPS was $1.65, surpassing the Street’s expectation by 10.7%. The solid growth “reflects improving demand across all of our offerings as more employers partner with ADP for their HCM solutions,” said Carlos Rodriguez, President and Chief Executive Officer, ADP.

However, employer hiring is gradually slowing down, with fewer jobs than expected in November, while jobless claims came in higher-than-expected, totaling 207,000 for the week ended Jan. 1. The labor market gains could trend downwards due to the uncertainty posed by the COVID-19 omicron variant.

Here is what could shape ADP’s performance in the near term:

Stretched Valuation

In terms of forward EV/Sales, ADP is currently trading at 6.50x, which is 53.3% higher than the 4.24x industry average. Also, ADP’s 15.99x forward Price/Book is 175.1% higher than the 5.81x industry average. Its 35.91 forward P/E multiple is 18.4% higher than the 30.32 industry average, while its trailing-12-month PEG is 664.7% higher than the industry average.

Impressive Dividend Paying History

ADP’s $4.16 annual dividend yields 1.72% at its current share price. On Nov.10, ADP declared a 12% increase in its quarterly cash dividend to $4.16 per share, marking the 47th consecutive year that ADP has raised its quarterly dividend. The new $1.04 per share quarterly dividend was payable on Jan. 1, 2022. “This 12% increase in our quarterly dividend represents a strong signal of the board’s confidence in ADP’s prospects for this fiscal year and beyond,” Rodriguez said.

ADP’s dividend payouts have increased at an 11% CAGR over the past three years and at a 12.1% CAGR over the past five years. Also, the company has a 61.5% dividend payout ratio.

Stable Profit Margins

ADP’s 26.05% EBITDA margin is 80.7% higher than the 14.42% industry average. Also, its 17.55% net income margin is 174.2% higher than the 6.40% industry average.

Furthermore,  ADP’s 48.33% and 25.61% respective ROE and ROTC compare with the 8.33% and 5.09% industry averages.

Consensus Price Target Indicates Downside

Of the eight Wall Street analysts that have rated the stock, two rated it Buy, while six rated it Hold. The median price target of $239 indicates a potential 1%  downside from its last closing price. Their price targets range from a low of $220 to a high of $250.

POWR Ratings Reflect Uncertain Prospects

ADP has an overall C rating, which translates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a grade of D for Value, consistent with its lofty valuation.

ADP also has a C grade for Sentiment. This is justified because out of the eight Wall Street analysts rating the stock; six rated it Hold.

Of  46 stocks in the Outsourcing - Business Services industry, ADP is ranked #23.

Beyond what I have stated above, one can also view ADP’s grades for Quality, Growth, Momentum, and Stability here.

View the top-rated stocks in the Outsourcing - Business Services industry here.

Bottom Line

ADP has benefited from the favorable labor market trends that have led to increased demand for its human capital management solutions. However, the omicron variant poses concerns regarding the job market’s recovery and may hinder the unemployment rate from regaining pre-pandemic levels. Moreover, Wall Street analysts see a potential downside in the stock. So, considering its stretched valuation, we think it could be wise to wait for ADP’s prospects to stabilize before investing in the stock.

How Does Automatic Data Processing, Inc. (ADP) Stack Up Against its Peers?

While ADP has an overall POWR Rating of C, one might want to consider taking a look at its industry peers TriNet Group, Inc. (TNET), ARC Document Solutions, Inc. (ARC), and Insperity, Inc. (NSP), which have an A (Strong Buy) rating.

ADP shares were unchanged in premarket trading Friday. Year-to-date, ADP has declined -2.10%, versus a -1.48% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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