Automatic Data Processing Stock Looks Like a Winner

These reports, excerpted and edited by Barron’s, were recently published by investment and research firms. The reports are a sample of the analysts’ thinking; they should not be considered Barron’s opinions or recommendations. Some of the issuers of the reports have provided, or expect to provide, investment banking or other services to the companies analyzed.

In ADP’s first quarter of fiscal 2021, revenue and earnings exceeded our guidance and Street estimates, despite the unprecedented decline in global employment. More importantly, new business bookings in Employer Services increased 2%, up sharply from the 67% decline in the fourth quarter of fiscal 2020, fueled by successful digital marketing initiatives and the recalibration of the sales force to sell virtually.

Internationally, bookings were strong. While in the second quarter of fiscal 2021 bookings could decline slightly, given partial shutdowns in Europe combined with US election uncertainty, fiscal 2021 bookings could increase by 10% to 20%, which bodes well for fiscal 2022 and beyond. Based on our survey, we believe the demand trends for ADP products are strong. Employer services customer retention is skyrocketing, benefiting from customers delaying the decision to switch, but also from higher customer satisfaction. Our price target is $197.

Mastercard MA-NYSE

Positive Price $317.11 on October 28

by Susquehanna International Group

As in past recessions, credit is underperforming debit, and this change puts Mastercard at a disadvantage. Although there is a quarterly lag,


Visa

[ticker: V] mixed volume 52% debit (last quarter) vs 43% debit for Mastercard (this quarter).

Utility-type expenses, such as groceries and gas, remain healthy, but generally tend to debit. In contrast, discretionary spending, such as travel and entertainment, is biased in favor of credit. Although the company described normalization or even growth in some discretionary categories, personal and business travel [abroad] remain weak. We are reducing estimates and remaining positive on stocks, although it may take longer to reach our price target of $380.


Bed bath and beyond

BBBY-Nasdaq

Underweight Price $21.10 on October 28

by Wells Fargo Securities

Bed Bath’s long-awaited Investor Day showcased a dynamic management team, an upbeat presentation and a well-articulated, if somewhat ambitious, transformation plan with an aggressive focus on omnichannel growth, channel improvement sourcing and differentiation (via remodels and own brands) from its peers.

The company is clearly taking steps to improve its business, is pleased with recent momentum, and expects long-term initiatives to deliver significant margin growth (with earnings before interest, taxes, depreciation and amortization, or Ebitda, up 600 basis points [six percentage points] by FY2023). That said, transformation won’t come cheap, the bulk of the work remains to be done, and the spotlight turns to execution during a time of growing macroeconomic uncertainty, wobbly year-to-year comparisons, and rapidly changing consumer needs and preferences.

While CEO Mark Tritton & Co. has spoken of a good game, we see an opportunity to take profits as shares of Bed Bath are up 104% in three months (vs. 2% for the S&P index 500), expectations calibrate higher and the success of new initiatives is unlikely to be linear. Reiterate price target of $17 (14x our FY2022 earnings estimate).


eBay

EBAY-Nasdaq

To buy Price $53.25 on October 29

by reference

Despite the strong third quarter results and fourth quarter guidance which, barring classifieds, should have numbers coming in, we expect eBay shares to be weak again in the open. Comments about actively incentivizing buyers and moderating demand from increased mobility will likely raise the same questions of sustainable organic growth that have plagued the stock for years.

Neglecting 1) significant improvement in gross merchandise value from active buyers, supported by new brand programs, which should raise the growth floor; 2) the strength of payments and adverts promoted; 3) price appreciation in


Advinta

[a global digital marketplace specialist in which eBay holds a stake]; and 4) an aggressive share buyback program. At just 15 times estimated 2021 earnings per share and 10 times EBITDA, excluding Adevinta’s participation, eBay seems cheap. We are increasing our 2020 revenue and EBITDA guidance by $200 million. Our EPS forecast rises 28 cents, to $3.38 per share, on a planned $500 million increase in the share buyback program. For 2021, our EPS forecast increases by 20 cents, to $3.50. Increased share price target to $75 from $70.


air sealed

SEE-NYSE

Market performance Price $40.90 on October 27

by BMO Capital Markets

We downgraded Sealed Air in April on the assumption that Covid-19 would have an outsized impact on a portfolio exposed to meatpacking plants, foodservice and industrial/transportation markets. Management proved us wrong. E-commerce and equipment volumes accelerated, and restructuring offset cost headwinds. We applaud Sealed Air’s performance. However, the valuation isn’t cheap at 9.4x our 2021 Ebitda estimate. Price target: $42.

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