ADP Earnings: Robust Demand and Sticky Clients Despite Near-Term Macro Headwinds; Fair Value Estimate Raised to $244

We’ve raised our fair value estimate for wide-moat ADP 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.

Fiscal fourth-quarter top-line growth of 8% year on year was marginally ahead of our expectations as labor markets proved more resilient than forecast. This result was led by 11% growth in the employer services segment on new-business bookings, record client retention, and a sharp increase in ultra-high-margin interest income, partly offset by decelerating growth in the professional employer organization business. This revenue uplift and improved operating leverage on a larger client base supported an impressive 270-basis-point operating margin expansion to 22.5%, partly offset by higher selling expenses in the PEO business.

For all of fiscal 2023, ADP reported sound revenue growth of 9% and adjusted operating margin expansion of 130 basis points to 24.8%, both marginally ahead of our forecasts following outperformance in the fourth quarter. This top-line growth reflects a slight deceleration from the prior year as tailwinds from a postpandemic labor recovery faded, as well as a slight drag from foreign-exchange headwinds.