ADP, Paychex to be hit by slow job growth: Barclays

Mon Jun 25, 2012 – Payroll processors Automatic Data Processing Inc. and Paychex Inc. may see slower earnings growth over the next two years because of low interest rates and weak job market recovery, Barclays Capital said, downgrading the stocks.

Both companies could see only moderate core payroll revenue growth given the weak jobs growth, while persistently low interest rates will hurt their float income — interest earned on funds held for clients, Barclays said.

Barclays, which is less optimistic on Paychex, cut its rating on the stock to “underweight” from “equal weight.” It downgraded ADP to “equal weight” from “overweight.”

Earnings growth at ADP is unlikely to return to consistent double digit levels until the economy grows more rapidly and interest rates rise, the brokerage said.

U.S. job growth braked sharply for a third straight month in May, and the unemployment rate climbed for the first time in nearly a year, raising chances of further monetary stimulus from the Federal Reserve to support the sputtering recovery.

Barclays prefers ADP over Paychex, as it expects ADP’s more diversified offerings and aggressive product development investments to yield faster growth.

The brokerage, however, upgraded Iron Mountain to “overweight” rating, saying the document storage company’s planned transformation into a real estate investment trust is likely to prove successful and give a sharp boost to its share price over the next two years.