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Wolfe Research Upgrades ADP (ADP) to Peerperform, 'we believe the bar has been set at a more reasonable spot'

January 4, 2024 5:52 AM EST
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Price: $243.31 +0.55%

Rating Summary:
    5 Buy, 19 Hold, 3 Sell

Rating Trend: = Flat

Today's Overall Ratings:
    Up: 11 | Down: 18 | New: 17
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(Updated - January 4, 2024 7:17 AM EST)

Wolfe Research analyst Darrin Peller upgraded ADP (NASDAQ: ADP) from Underperform to Peerperform.

The analyst comments "YTD ADP shares are down 0.2% versus the S&P down 1.4%, and the Wolfe Research Business and Information Services Index down 3.9%. While we remain cautious on the employment environment heading into 2024, we believe that if unemployment were to begin to rise in a more material way, we prefer ADP relative to PAYX given the company’s more diverse client exposure. We see ADP having mid-teens revenue exposure to small businesses, compared to PAYX which is largely exposed to SMBs. We believe much of the job losses that have occurred over the last have been concentrated in sectors/client sizes that ADP is more exposed to, and see a more material rise in unemployment having a greater impact on the smaller end of the client size spectrum. Management has already guided down on PEO revenue growth this year, and we believe the bar has been set at a more reasonable spot for PEO growth in FY24. While rates have come down meaningfully in recent weeks, we note that: 1) ADP ladders out its maturities for client fund investments, which should help support elevated float income yields over the near-term and 2) a gradual re-normalization of the yield curve can benefit EPS as ADP borrows commercial paper to fund longer-term investments. ADP is currently trading at a 24.3x NTM P/E multiple on consensus estimates versus its 1-, 3-, and 5-year median NTM P/E multiple of 25.1x, 28.2x, and 27.1x, respectively. On a relative basis, shares are trading 5.1x above the market, versus its 1-, 3-, and 5-year median NTM P/E spreads of 6.9x, 9.4x, and 8.7x, respectively. Our fair value range of $230-250 is predicated on ~22-24x our CY25 adjusted EPS estimate of $10.45."

For an analyst ratings summary and ratings history on ADP click here. For more ratings news on ADP click here.

Shares of ADP closed at $232.51 yesterday.


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