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This Overpriced Wide-Moat Firm May Be Losing Its Edge

We have some concerns about Automatic Data Processing's moat.


As the largest provider of payroll services in the United States, Automatic Data Processing should continue to benefit from the evolving and increasingly complex relationship between businesses and their employees. But in the medium term, we see challenges.

ADP currently enjoys a wide moat thanks to traditionally high switching costs. The incremental investment required to add a new customer or an employee to a platform is small, which in recent years has resulted in high incremental returns and margins for ADP. In general, employers will pay a flat service fee and then additional fees for every employee added to the system.

Colin Plunkett does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.