Company Reports

We maintain our $240 fair value estimate for wide-moat ADP following a robust second-quarter result, which tracks our full-year top line and profitability expectations. While employment growth continues to moderate as we expected, ADP reported strong bookings momentum, pointing to a healthy demand environment and stabilizing hiring activity in the professional employer organization as recent sector-specific headwinds abate. Management maintained the firm’s full-year top-line growth outlook; however, narrowed margin guidance on the expectation of lower interest rates, dragging on float income and higher technology spending. Our unchanged forecasts are consistent with updated guidance, and we view ADP shares as fairly valued.

ADP has invested heavily over the past decade to develop public cloud native solutions and consolidate its portfolio of disparate platforms. ADP had successfully migrated most of its small and midsize clients to its strategic platforms as of fiscal 2021 and will be migrating enterprise clients to its new human capital management platform over the coming decade, as well as rolling out its new underlying payroll and tax engines. While we expect platform migrations to ultimately result in higher retention and profitability, the forced migrations will likely create a catalyst for enterprise clients to reassess providers, temporarily hindering both metrics.

Wide-moat ADP posted a reasonable start to fiscal 2024, with healthy new business bookings led by demand for the professional employer organization, or PEO; and small business and compliance solutions; robust retention despite normalizing attrition; and marginal profitability uplift. Employment growth continues to decelerate as expected. However, the PEO saw a more rapid deceleration due to a skew to professional services and technology sectors that curbed hiring faster than the overall base. While we expect healthy new client demand and improving retention to support a stronger second half for the PEO, we've marginally trimmed our longer-term forecasts for the segment, resulting in a cut to our fair value estimate to $240, from $244. Despite a sharp selloff post-result, ADP shares screen as fairly valued.

We've raised our fair value estimate for wide-moat ADP by 7% to $244 per share to reflect an improved profitability outlook as well as the time value of money upon our model roll following a strong finish to fiscal 2023. Despite challenging macroeconomic conditions, the firm continues to enjoy robust demand across a broad suite of payroll and human resources outsourcing solutions, resilient client retention, and healthy—albeit moderating—employment growth within its client base. The shares currently screen as fairly valued relative to our updated valuation.

ADP has invested heavily over the past decade to develop public cloud native solutions and consolidate its portfolio of disparate platforms. ADP had successfully migrated most of its small and midsize clients to its strategic platforms as of fiscal 2021 and will be migrating enterprise clients to its new human capital management platform over the coming decade, as well as rolling out its new underlying payroll and tax engines. While we expect platform migrations to ultimately result in higher retention and profitability, the forced migrations will likely create a catalyst for enterprise clients to reassess providers, temporarily hindering both metrics.

ADP has invested heavily over the past decade to develop public cloud native solutions and consolidate its portfolio of disparate platforms. As of fiscal 2021, ADP has successfully migrated most of its small and midsize clients to its strategic platforms and will be migrating enterprise clients to its new human capital management platform over the coming decade, as well as rolling out its new underlying payroll and tax engines. While we expect platform migrations to ultimately result in higher retention and profitability, the forced migrations will likely create a catalyst for enterprise clients to reassess providers, temporarily hindering both metrics.

We maintain our $228 fair value estimate for wide-moat ADP following a sound third-quarter result. Amid a backdrop of challenging macroeconomic conditions and a series of high-profile layoffs, ADP continues to benefit from sticky clients—which underpins our moat rating—and a large, diversified client base. ADP’s exposure to multiple sectors, market segments and geographies allowed the firm to more than offset layoffs at enterprise clients with strong demand elsewhere, including from the small business market fueled by elevated new business formation. At current prices, ADP shares screen as fairly valued relative to our unchanged valuation.

We maintain our $228 fair value estimate for wide-moat ADP following another sound quarter in an uncertain macroeconomic environment. Second-quarter revenue growth of 9% year over year reflects a slight deceleration from 10% in the first quarter but remained supported by continued, albeit moderating, employment growth, higher interest on client funds, and resilient retention, partly offset by foreign exchange headwinds. Higher employment within ADP’s client base drove improved operating leverage, and greater contribution from ultra-high-margin client funds interest revenue supported a healthy 120-basis-point year-on-year adjusted operating margin expansion to 24.3%. After falling following the results release, shares currently trade in line with our unchanged valuation.

ADP has invested heavily over the past decade to develop public cloud native solutions and consolidate its portfolio of disparate platforms. As of fiscal 2021, ADP has successfully migrated most of its small and midsize clients to its strategic platforms and will be migrating enterprise clients to its new human capital management platform over the coming decade, as well as rolling out its new underlying payroll and tax engines. While we expect platform migrations to ultimately result in higher retention and profitability, the forced migrations will likely create a catalyst for enterprise clients to reassess providers, temporarily hindering both metrics.

We maintain our $228 fair value estimate for wide-moat ADP following a sound start to fiscal 2023. First-quarter top-line growth of 10% year on year was supported by continued, albeit moderating, growth in employment, higher interest on client funds, like-for-like price increases, and resilient client retention, partly offset by foreign-exchange headwinds. Increasing employment within ADP’s client base drove improved operating leverage, and greater contribution from ultra-high-margin client funds interest revenue supported operating margin expansion of 30 basis points to 24.1%, offsetting increased labor and selling expenses.

ADP has invested heavily over the past decade to develop public cloud native solutions and consolidate its portfolio of disparate platforms. As of fiscal 2021, ADP has successfully migrated most of its small and midsize clients to its strategic platforms and will be migrating enterprise clients to its new human capital management platform over the coming decade, as well as rolling out its new underlying payroll and tax engines. While we expect platform migrations to ultimately result in higher retention and profitability, the forced migrations will likely create a catalyst for enterprise clients to reassess providers, temporarily hindering both metrics.

Wide-moat ADP reported a solid fiscal 2022 result that was in line with our expectations. Full-year group revenue increased 10% year on year supported by resilient retention, a recovery in labor markets, and continued demand for solutions to attract, manage, and retain employees amid tight labor markets. Increased operating leverage and higher interest income from a larger client base supported a 90-basis-point increase in adjusted operating margin, to 23.5%. While the result met our expectations, we have adjusted our medium-term economic forecasts to factor in a near-term slowdown in growth before a recovery in fiscal 2024. However, the minor dilutive impact of this adjustment is offset by time value of money, and we maintain our $228 fair value estimate. At current prices, ADP is trading in line with our valuation.

ADP has invested heavily over the past decade to develop public cloud native solutions and consolidate its portfolio of disparate platforms. As of fiscal 2021, ADP has successfully migrated most of its small and midsize clients to its strategic platforms and will be migrating enterprise clients to its new HCM platform over the coming decade, as well as rolling out its new underlying payroll and tax engines. While we expect platform migrations to ultimately result in higher retention and profitability, the forced migrations will likely create a catalyst for enterprise clients to reassess providers, temporarily hindering both metrics.

ADP has invested heavily over the past decade to develop public cloud native solutions and consolidate its portfolio of disparate platforms. As of fiscal 2021, ADP has successfully migrated most of its small and midsize clients to its strategic platforms and will be migrating enterprise clients to its new HCM platform over the coming decade, as well as rolling out its new underlying payroll and tax engines. While we expect platform migrations to ultimately result in higher retention and profitability, the forced migrations will likely create a catalyst for enterprise clients to reassess providers, temporarily hindering both metrics.

We raise our fair value estimate for ADP 3% to $228 from $222 due to equal parts time value of money and a modest upgrade to medium-term forecasts following a strong fiscal 2022 third-quarter result. Our fair value estimate sits in line with the current share price.

ADP has invested heavily over the past decade to develop public cloud native solutions and consolidate its portfolio of disparate platforms. As of fiscal 2021, ADP has successfully migrated most of its small and midsize clients to its strategic platforms and will be migrating enterprise clients to its new HCM platform over the coming decade, as well as rolling out its new underlying payroll and tax engines. While we expect platform migrations to ultimately result in higher retention and profitability, the forced migrations will likely create a catalyst for enterprise clients to reassess providers, temporarily hindering both metrics.

We raise our fair value estimate for ADP 3% to $222 following strong fiscal 2022 second-quarter results. Management lifted its full-year earnings guidance, reflecting an improved outlook for revenue retention and interest on client funds, and a continued recovery in labor markets aided by greater labor force participation. Despite ongoing disruptions to economic activity due to COVID-19 outbreaks, we are marginally more optimistic and expect fiscal 2022 earnings per share to increase 15% to $6.91, which is above the 12% to 14% guidance range. ADP now screens as undervalued, trading at approximately a 12% discount to our updated valuation.

We’ve raised our fair value estimate for wide-moat ADP 7% to $216 per share on upgraded medium-term forecasts following the fiscal 2021 Investor Day. At current share prices, ADP is trading at about a 9% premium to our updated fair value estimate.

ADP has invested heavily over the past decade to develop public cloud native solutions and consolidate its portfolio of disparate platforms. As of fiscal 2021, ADP has successfully migrated most of its small and midsize clients to its strategic platforms and will be migrating enterprise clients to its new HCM platform over the coming decade, as well as rolling out its new underlying payroll and tax engines. While we expect platform migrations to ultimately result in higher retention and profitability, the forced migrations will likely create a catalyst for enterprise clients to reassess providers, temporarily hindering both metrics.

Wide-moat ADP benefited from improved economic conditions during the first quarter of fiscal 2022, supporting strong demand for its payroll and human capital management solutions. We maintain our $202 fair value estimate. Group revenue increased 10% on the COVID-19-affected prior period, with a standout 15% revenue growth in the professional employer organization segment underpinned by a recovery in average worksite employees. Improved operating leverage driven by greater sales productivity and deferred internal hiring underpinned adjusted EPS growth of 17%.