Automatic Data Processing, Inc. (NASDAQ:ADP)
ADP hosted its first Analyst Day since 2015 this past quarter. At the Analyst Day, the company committed to achieving 7% to 9% revenue growth and pre-tax operating margins of 23% to 25% by FY 2021. These projections represent substantial increases to management’s prior guidance. The new margin targets imply annual earnings-per-share growth of 16% to 19% over the next three fiscal years, with a FY 2021 earnings target of approximately $7 per share. We believe there continues to be a significant opportunity for ADP to exceed the new FY 2021 ~$7 guidance, and for future accelerated progress thereafter, which we discussed in detail in a letter we published following the Analyst Day, available here: https://www.businesswire.com/news/home/20180619006504/en/Pershing-Square-Sends-Communication-Investors-ADP
Earlier this month, ADP reported fiscal Q4 results and introduced FY 2019 guidance. Fiscal Q4 results were strong, evidenced by accelerating year-over-year bookings growth (+18%), robust top-line growth (+8% as reported, +6% organic growth) and significant margin expansion. EPS was up 39% year-over-year, helped by ~400 basis points of net-economic margin expansion (excluding pass-throughs and float income growth) and the benefits of corporate tax reform.
More significantly, the company introduced FY 2019 guidance. ADP projected “economic” revenue growth of 5% to 7% (excluding non-economic Professional Employer Organization (“PEO”) pass-throughs), continued operational margin expansion, and increased float income, with EPS projected to grow 13% to 15% over FY 2018 (pro forma for a recently adopted accounting change, ASC 606). Based on current guidance, ADP should realize $5.12 to $5.21 of Adjusted EPS for FY 2019. While we believe current guidance is a positive step towards ADP’s long-term FY 2021 targets, there continues to be a significant opportunity for additional operational margin expansion in the coming years as ADP closes the gap in Employer Service relative to its structural potential.
At the June Analyst Day, CFO Jan Siegmund, who is held in high regard by shareholders, announced that he would be leaving the company when a replacement is identified. We believe the hiring of a new CFO with operational expertise in executing business transformations would be well received by shareholders.
From Bill Ackman (Trades, Portfolio)'s second quarter 2018 Pershing Square shareholder letter.
