Price target revision and current trading
Stifel reduced its price target on Automatic Data Processing Inc. to $270.00 from $280.00 and maintained a Hold rating on the human capital management company. ADP shares are trading at $231.36, down more than 10% year-to-date and hovering close to a 52-week low of $230.28.
Context of the change
The adjustment followed a recent meeting between Stifel analysts and ADP leadership, including the President of Global Product/Innovation and the chief financial officer, in which the parties discussed the impact of artificial intelligence on labor markets and on ADP's underlying business model.
Stifel's view on AI and ADP's positioning
Stifel acknowledged that AI represents a disruptive force but stated that market sentiment appears to be overstating the near-term risks to ADP. The firm emphasized that this perspective may underappreciate ADP's competitive advantages and the potential opportunities the company could capture as the environment evolves.
According to Stifel, ADP is already realizing its largest internal efficiency gains in customer service and software development. At the same time, ADP has not observed AI materially changing overall employment patterns among its client base.
Valuation and growth outlook
Stifel highlighted that ADP shares trade at a 17% premium to the equal-weight S&P 500, which the firm notes is the stock's lowest relative level since the financial crisis, compared with a historical range of roughly 50% to 60%. Stifel views this compression in relative valuation as creating a compelling risk/reward profile for a company with what it describes as relatively stable high-single-digit to low-double-digit growth.
Earnings and macro backdrop
Automatic Data Processing reported fiscal second-quarter results that edged past analyst expectations. Earnings per share were $2.62 versus a forecast of $2.57, while revenue came in at $5.4 billion compared with an anticipated $5.34 billion. Those results underline a solid quarter for ADP even as the stock moved lower in pre-market trading.
On the labor-market side, the ADP National Employment Report showed the U.S. private sector added only 22,000 jobs in January, indicating a slowdown in hiring. Sector-level details from the report showed education and health services adding 74,000 positions, manufacturing losing 8,000 jobs, and professional and business services shedding 57,000 roles. These data points form part of the broader operating context for ADP's business.
Bottom line
Stifel's modest cut to ADP's price target and its maintained Hold rating reflect a cautious stance following direct discussions about AI-related disruption. The firm points to internal efficiency gains and a compressed relative valuation as reasons to consider the company's risk/reward more favorably, while recent employment data highlight an uncertain demand backdrop.