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Automatic Data Processing Inc. (ADP) is set to announce its fiscal third quarter 2012 results before the opening bell on Tuesday, May 1, 2012. In the run up to the earnings results, no substantial movement in analysts' estimates for the quarter was noticed.

Looking Back at the Prior Quarter

Both of ADP's top and bottom lines came in line with the Zacks Consensus Estimate in the second quarter of 2012. Quarterly revenues increased 7.4% on a year-over-year basis to $2.58 billion, primarily due to strong new business sales, improving client retention and incremental revenue from recent acquisitions.

Earnings per share (EPS) increased 9.7% year over year on the back of strong revenue growth.

For further details please read: ADP Matches Estimates in 2Q

2012 Outlook

For fiscal 2012, ADP expects total revenue to increase in the range of 7.0%-9.0%. EPS is expected to increase 8%-9% over $2.52 reported in year-ago quarter. The Zacks Consensus Estimate for fiscal 2012 is pegged at $2.74 per share.

Employer Services is expected to grow approximately 7% and pre-tax margins to expand 30 bps. The company expects pays per control to increase approximately 2.5% (prior outlook 2.0%) for fiscal 2012.

PEO Services revenue is forecasted to improve 17.0%. Pre-tax margin is expected to improve slightly on a year-over-year basis. ADP expects Dealer Services revenue to increase in the 9.0%-10.0% range (prior forecast 8%-9%) with a pre-tax margin expansion of at least 50 bps.

The company expects interest on funds held for clients to decline by $45.0 million to $55.0 million or 8%-10% from $540.1 million in fiscal 2011. However, the company expects 6%-7% increase in the average client fund balances.

Estimates Trend Revision

Over the past 30 days, only one out of the 20 analysts covering the stock revised the estimate downward, while no upward revision was noticed for the quarter. With only one downward revision, the Zacks Consensus Estimate for the third quarter is pinned at 91 cents per share.

For fiscal 2012, none of the 24 analysts covering the stock revised any estimate in the last 30 days. Thus, the Zacks Consensus Estimate for fiscal 2012 is pinned at $2.74 per share.

The analysts covering the stock opine that ADP will likely post in line results on the back of improvement in the employment market coupled with growth in the new business sales and strategic acquisitions to pave way for top-line growth in the forthcoming quarters.

Our Take

We note that ADP's earning has always matched the Zacks Consensus Estimates for the past four quarters and for the current quarter we expect the phenomenon to continue.

ADP is expected to report an in line third quarter backed by new business sales, diversified product portfolio, improving customer retention, accretive acquisitions, strong balance sheet and shareholder-friendly programs (aggressive share buybacks, dividend) over the long term.

However, increasing competition from Paychex Inc. (PAYX) and Insperity Inc. (NSP) and a gloomy macroeconomic outlook in the Europe are major headwinds in the near term. Additionally, higher-than-expected unemployment rates and low interest rates remain concerns for the company's payroll processing business.

We have a Neutral recommendation on ADP over the long term. Currently, ADP has a Zacks #2 Rank, which implies a 'Buy' rating in the short term.

Source: Automatic Data Processing: Earnings Preview