Automatic Data Processing Inc. (ADP) recently provided an updated guidance for fiscal 2015 considering the spin-off its dealer services segment, CDK Global. The two companies will be separated through a distribution of CDK Global shares after the market closes on Sep 30, 2014.
ADP shareholders of record as of Sep 24 will receive one share of CDK Global common stock for every three shares of ADP common stock held. Once the spin-off gets completed, ADP will be reporting the operational results of the Dealer Services segment under “discontinued operations”.
Accordingly, the company forecasts its earnings per share from continuing operations to grow 12% to 14% in fiscal 2015, up from 11-13% as per the prior guidance. However, the Zacks Consensus Estimate for the same is pegged at 73 cents, up 10.6% from the year ago quarter.
This newly forecasted figure is inclusive of 2 cents benefit that the company expects from the incremental share repurchase. The share repurchase program will be funded from the tax free $825 million that ADP expects to receive on account of the CDK Global spin-off. This share repurchase program is expected to be completed by Jun 30, 2015.
ADP reiterated its revenue guidance for fiscal 2015, which is expected to rise 7% to 8% on a year-over-year basis.The Zacks Consensus Estimate for the same is pegged at $3.05 billion, up 8.5% on a year-over-year basis.
We believe that the spin-off will enable both ADP as well as CDK Global to focus on their core operations. ADP will remain focused on enhancing its position as a leading global provider of HCM solutions, while CDK Global will focus on providing leading global technology solutions to help dealers and manufacturers perform better over the long term.
ADP is expected to perform better on the back of improved execution and higher client retention. Moreover, recovery in the job market will help the company. However, a volatile macroeconomic environment and increasing competition from Paychex Inc. (PAYX) and Equifax Inc. (EFX) are the near-term headwinds.
However, the Dealer Services spin-off will remain an overhang on the stock in the near term. Although the plan is shareholder friendly, it did not go down well with credit rating agencies.
Following the announcement, Standard & Poor’s lowered ADP’s credit rating from AAA to AA, primarily due to the company’s plan of using the proceeds to buy back shares. Moody’s (MCO) Investor service also decreased its rating to Aa1, citing lower scale and variety of ADP’s product portfolio.
Currently, ADP has a Zacks Rank #3 (Hold).
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