ADP and Paychex downgraded to Underperform at BofA on slower growth outlook
tattywelshie

Automatic Data Processing (NASDAQ:ADP) stock fell 2.5% and Paychex (NASDAQ:PAYX) slipped 2.1% in Monday premarket trading after BofA Securities analyst Jason Kupferberg downgraded the two companies to Underperform from Neutral due to slower expected revenue growth and limited upside potential.
"Our analysis suggests that both ADP and PAYX tend to underperform the S&P 500 during the initial phase of a rising unemployment cycle," the analyst wrote in a note to clients. BofA Global Research's Economics team forecasts unemployment starting to rise in Q3 2023 and peaking in Q2 2024 as well as one more 25-basis-point rate hike before cuts begin in Q1 2024.
"This is a cyclical call â we believe that ADPâs and PAYXâs business models remain structurally sound, and if extreme market volatility re-surfaces, these stocks could be viewed as relative 'safe havens,' especially as key metrics, such as retention, remain robust (but likely have limited room for improvement)," he said.
At this point of the cycle, Kupferberg prefers Mastercard (MA), Block (SQ), and Visa (V) in large-cap payment stocks. He sees the card payment networks as "particularly durable businesses in the payments landscape, with EPS protection in almost any macro scenario."
For Block (SQ), he considers the stock to be oversold on the recent short report. The company's response on Thursday to the short report was "robust and re-assuring," he said.
Kuperberg's Underperform rating on ADP contrasts with the SA Quant rating of Buy and diverges from the average Wall Street rating of Hold. Meanwhile, for Paychex (PAYX) the SA Quant rating and average Wall Street rating both stand at Hold.
Offering a more bullish view on Paychex (PAYX), SA contributor Cash Builder Opportunities says the company delivered another solid quarter growth on top and bottom lines.