Goldman Sachs upgrades ADP because the payroll processor with a largely domestic footprint will be an “outsized beneficiary” of the corporate tax cut.
Goldman also cited strong new bookings for its upgrade. Shares of ADP were up 1.7 percent in premarket trading Monday after the call.
A reduction in the corporate rate to 20 percent as proposed by Congressional Republicans will drive earnings higher, argued analyst James Schneider, who raised the stock to buy from neutral. The new rating makes Goldman one of just a few companies on Wall Street with a buy rating on the company, which just successfully fought off activist Bill Ackman from taking a board seat.
“We estimate that tax reform could be 14 percent accretive to ADP’s calendar year 2019 earnings per share, assuming a 20 percent corporate tax rate and the repeal of certain corporate tax deductions,” Goldman analyst James Schneider wrote on Monday.
Seeking to clinch their first major legislative victory in 2017, Republicans have been scrambling to live up to campaign promises by cutting tax rates. With the House and Senate now in conference, investors are now betting on a lower corporate tax rate and better results for companies with domestic exposure.
The Goldman analyst argued that ADP “stands out” from other companies in the information technology sector thanks to its higher U.S. sales exposure. While information technology has lower U.S. sales exposure than the overall S&P 500 (48 percent vs. 71 percent), ADP is far ahead of its peers domestically with 85 percent U.S. exposure, according to Goldman.
Schneider increased his price target on ADP to $135 from $110, representing 16 percent upside over the next 12 months. A relaxed corporate rate should improve ADP earnings, but rising interest rates may also prove to be a boon.
Though Goldman is above consensus in predicting four increases in the Federal Funds Rate in 2018, rising interest rates should benefit the company’s float income, added Schneider.
“Our economists expect steady interest rate increases over the next few years; they expect the Federal Funds Rate to increase by 100 basis points in both 2018 and 2019,” explained the analyst. “This would lead ADP’s portfolio yield to inflect higher and drive significant earnings per share accretion … Based on the current trajectory of interest rates, we see the potential for roughly 6 percent upside to fiscal year 2019 earnings per share if rates increase an additional 50 basis points.”
Just one other firm has a buy rating on ADP, according to TipRanks.com: Bank of America Merrill Lynch.
Source: Investment Cnbc
Goldman upgrades ADP, says it will be 'outsized beneficiary' of GOP tax cuts