On Thursday, Stifel maintained a Hold rating on shares of Automatic Data Processing (NASDAQ:ADP) but increased the price target to $305 from $287. This adjustment follows ADP's first-quarter performance, which showcased revenue and earnings per share (EPS) growth exceeding market expectations. The company reported a 7.0% year-over-year constant currency (cc) increase in revenue and a 12.4% rise in EPS, surpassing consensus estimates.
The improved financial outlook is partly due to better-than-anticipated Employer Services (ES) retention and Professional Employer Organization (PEO) bookings, which are linked to Worksite Employee (WSE) growth.
Moreover, client funds contributed positively, although no quarterly guidance was provided for this metric. The forecast for fiscal year 2025 has been updated to reflect the near-term effects of the WorkForce Software (WFS) acquisition and the first-quarter performance.
ADP's revenue growth projection for FY25 has been increased by 100 basis points, approximately $200 million, to 6-7%. This increment is attributed equally to the WFS acquisition and the strength observed in the first quarter.
However, the expected improvement in EBIT margin has been scaled back from an increase of 60-80 basis points year-over-year to 30-50 basis points. This revision accounts for around $50 million in acquisition-related headwinds, which are partly mitigated by the first-quarter results.
EPS growth estimates for FY25 have been lowered by 100 basis points to 7-9%. This adjustment reflects the aforementioned factors and a slight reduction in client funds interest, which amounts to about $10 million.
Despite the first quarter being seasonally weak, ADP experienced robust bookings across all segments. Same-store hiring, measured by pay-per-click (PPC), was consistent with expectations, indicating that employment markets remain stable.
The report suggests that ADP's first-quarter outcome was solid and stable, aligning with market predictions. The stock is expected to continue its defensive trading pattern due to the predictability of its business model, which supports high single-digit earnings growth and offers a dividend yield of approximately 2%.
The new stock price target of $305 represents a forecast based on a flat price-to-earnings ratio on the estimated CY26 EPS.
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