AUTOMATIC DATA PROCESSING INC (ADP): what the price requires
At today's price, AUTOMATIC DATA PROCESSING INC (ADP) is priced for +7.7% growth. boothcheck doesn't publish a fair value or a price target; it shows what the price assumes, so you can judge whether that bar is too high.
Generated: 2026-07-14 · Source: https://boothcheck.com/report/ADP
Headline
| Field | Value |
|---|---|
| Ticker | ADP |
| Company | AUTOMATIC DATA PROCESSING INC |
| Current price | $250.28/sh |
| Composition | Employer Services 67% / PEO Services 33% |
What The Price Requires (Inversion)
The assumption today's price embeds, recovered by inverting the valuation.
| Field | Value |
|---|---|
| Inversion basis | whole-company |
| Operating margin needed | 10.4% |
| Operating margin today | 27.7% |
| Margin compression implied | -17.3pp |
| Implied growth | 7.7% |
| Multiple paid | 17x operating income |
The operating-margin requirement is derived from the framework's value band at year 12, a separately labeled basis from the headline growth/duration solve.
Solve inputs: computed at a 9% cost of capital with 4% terminal growth over a 5-year stage; each 1pp of cost of capital moves the implied operating-profit growth ~5.4pp.
How unusual the bet is: within-range
| Reference | Value |
|---|---|
| vs own history | +0.52σ |
| cohort percentile (of 177 peers) | 24 |
| implied end-window share | 0% |
Valuation X-Ray
Asset, earnings-power and peer-multiple models all land far below the price; ONLY the growth-DCF reaches it. The bet is durable compounding the static frames structurally cannot price (a moat/durability premium).
How the valuation models price the stock relative to the market price. Price/FV above 1.0 means the market pays more than that lens defends (expensive); at or below 1.0 the lens can defend the price.
| Family | Median price/FV | Models | Reads |
|---|---|---|---|
| Asset | 1.72x | 4 | expensive |
| Earnings | 1.79x | 4 | expensive |
| Relative | 1.58x | 5 | expensive |
| Growth | 1.08x | 4 | expensive |
Families that justify the price: Growth Families that call it expensive: Asset, Earnings, Relative
The models below discount at their own flat-beta convention rates (cost of equity 9.3%, WACC 8.9%); the inversion above states its own rate.
Per-Model Detail (n=17)
| Model | Family | FV | Price/FV | Applicable | Methodology |
|---|---|---|---|---|---|
| DCF Perpetual Growth | Growth | $306.18 | 0.82x | yes | FCF base $5.6B, growth 7% (input: historical growth), terminal g 4.0%, WACC 8.9%, 6yr projection |
| DCF Exit Multiple | Growth | $272.19 | 0.92x | yes | Exit EV/EBITDA: 172.4x / 174.4x / 176.4x (bear / base = today's held flat / bull), 6yr |
| Relative Valuation | Relative | $240.43 | 1.04x | yes | P/E 35x (static sector reference · 2026-04), scenarios: 29.2x / 35.0x / 40.8x (bear / base = reference held flat / bull), EV/EBITDA 55x |
| Simple DDM | Growth | — | — | no | — |
| Two-Stage DDM | Growth | $160.87 | 1.56x | yes | Stage 1: 10% for 5yr, Stage 2: 3.5% perpetual |
| Simple Excess Return | Asset | $116.72 | 2.14x | yes | BV/sh $15.78, ROE (TTM) 68.4%, ke 9.3% |
| Two-Stage Excess Return | Asset | $470.13 | 0.53x | yes | 5yr excess ROE then converge to ke=9.3% |
| Discounted Future Market Cap | Growth | $202.37 | 1.24x | yes | Rev $21.6B, growth 7% (input: historical growth; tapered), Terminal P/S: 3.9x / 4.7x / 5.4x (bear / base = today's held flat / bull, cap 8x) |
| Peter Lynch Fair Value | Relative | $128.64 | 1.95x | yes | EPS $10.72, growth 10% (input: historical EPS growth), PEG=2.36 (Overvalued) |
| Margin Trajectory | Growth | — | — | no | — |
| Earnings Power Value | Earnings | — | — | no | — |
| Residual Income | Asset | $193.31 | 1.29x | yes | BV $15.78 + 5yr PV of (ROE (TTM) 68.4% − Kₑ 9.3%) × BV; BV grows 8.8%/yr |
| Graham Number | Asset | $61.69 | 4.06x | yes | √(22.5 × EPS $10.72 × BVPS $15.78) — Graham's conservative floor |
| EV/EBITDA Relative | Relative | $33.39 | 7.50x | yes | EBITDA $0.58B × sector EV/EBITDA 25.0x |
| FCF Yield | Earnings | $143.54 | 1.74x | yes | FCF $5452.4M / Kₑ 9.3% — zero-growth perpetuity |
| SBC-Adj FCF Yield | Earnings | $136.92 | 1.83x | yes | SBC-adj FCF $5.21B (FCF $5.45B − SBC $0.25B) capitalized at Kₑ |
| Ben Graham Formula | Earnings | $252.92 | 0.99x | yes | EPS $10.72 × (8.5 + 2×9.8%) × (4.4 / 5.3%) |
| ROIC-Justified P/B | Asset | — | — | no | — |
| P/Sales Sector | Relative | $429.33 | 0.58x | yes | Revenue $21.60B × sector P/S 8.0x |
| PEG Fair Value | Relative | $158.00 | 1.58x | yes | EPS $10.72 × (PEG 1.5 × growth 9.8% (input: historical EPS growth)) → PE 14.7x |
| Earnings Yield | Earnings | $115.89 | 2.16x | yes | EPS $10.72 / required return 9.3% (Rf 4.3% + ERP 5.0%) |
| Funds From Operations Multiple | Relative | — | — | no | — |
| Clinical Phase NPV | Growth | — | — | no | — |
| Merton | Asset | — | — | no | — |
| V5 Mechanical | — | — | — | no | — |
Solvency
| Field | Value |
|---|---|
| Net debt | $774.8m |
| Net debt / NOPAT (after-tax) | 0.17x |
| Net debt / operating income (pre-tax) | 0.13x |
| Interest coverage | 14.8x |
| Share count CAGR (buyback) | -1.1% |
| Burning cash | no |
Bullet Takeaways
- ADP runs payroll and human-capital software for hundreds of thousands of employers, a deeply embedded, recurring-revenue franchise that earns an extraordinary return on equity, above 65%, because the business needs very little capital to run.
- A hidden second engine is the float: ADP holds client payroll money briefly before it is paid out and earns interest on it, which makes a slice of its earnings sensitive to interest rates and to how many people its clients employ.
- Watch employment trends and the rate environment against raised fiscal 2026 guidance of 6% to 7% revenue growth and 10% to 11% adjusted EPS growth, the steady compounding that has made ADP a long-running dividend grower.
Bull Case
ADP is a mature compounder, and reading it correctly starts with accepting what that means: the numbers should be slow, steady, and extremely high-quality rather than exciting, and they are. Revenue grows in the mid-to-high single digits, earnings a notch faster, and the return on equity sits above 65%, the signature of a business that converts a small capital base into a large, recurring profit stream. For a company this size, the bull case is not acceleration; it is durability, the near-certainty that payroll keeps running and the customers keep paying, compounding quietly for years.
The moat is switching costs layered on trust. Payroll is mission-critical and unforgiving, an employer cannot afford to get it wrong, so once ADP is embedded in a company's pay cycle, tax filing, and compliance, replacing it is risky and rarely worth the trouble. ADP reinforces that with infrastructure competitors struggle to match: its filing notes that "the ADP Client Trust and ADP Trust Bank provide client funds with a level of protection that most competitors cannot offer." That trust apparatus is also the engine of the float, ADP holds client money briefly before disbursing it and earns interest on the balances, a high-margin earnings stream that scales with employment and rises with rates. Rising payroll and compliance complexity, now amplified by demand for AI-enabled human-capital tools, keeps pushing employers toward exactly the kind of outsourced expertise ADP sells.
The financial profile is close to ideal for a compounder. ADP carries almost no net leverage relative to its earnings, net debt is barely a tenth of a year's operating income, with interest covered more than thirteen times, and it returns cash relentlessly through a long-growing dividend and steady buybacks that shrink the share count about 1% a year. A capital-light business with a 65%-plus return on equity, a sticky recurring base, and a rate-sensitive float can raise its dividend through almost any environment. The bull case is the simplest kind: a high-quality, hard-to-displace franchise that compounds, priced at a multiple the value methods do not find demanding.
Bear Case
The bear case runs through the two outside variables ADP cannot control: employment and interest rates. A large part of ADP's revenue scales with the number of people on its clients' payrolls, so a recession that lifts unemployment shrinks the billable base directly, fewer paychecks processed, fewer employees under management, lower pay-per-employee fees. The float compounds that sensitivity. ADP earns interest on the client money it holds, and that income rises and falls with rates and with payroll volumes, so a downturn that cuts both employment and rates hits two earnings streams at once. This is a high-quality business, but it is a high-quality business with real cyclicality hiding inside a steady-looking model.
The competitive picture is also less placid than the incumbency suggests. ADP's filing is candid that disclosing too much about its strategy "may be exploited by our competitors" and may affect its ability to "attract and retain qualified personnel, potential clients and business partners." The human-capital software market is crowded with cloud-native challengers competing on user experience and price, and the same AI tools ADP cites as a tailwind also lower the barrier for nimbler rivals to automate parts of payroll and HR. Incumbency slows displacement; it does not stop pricing pressure at the margin, and in a slower-hiring economy the competition for each new client intensifies.
The valuation is where the bear has the least room, and honesty requires saying so. On the company's economics the static methods do not call ADP cheap, the asset, earnings-power, and peer-multiple lenses all read it as fully or richly valued, and only the forward-growth method reaches the price, which is the signature of paying a premium for durable compounding. Inverted on operating income, the price implies only about 4.4% annual operating growth, which is undemanding for ADP, so the bear is not really an overvaluation argument. It is that a premium-quality franchise priced for steady growth has limited margin for a cyclical air pocket: if employment softens and rates fall together, the growth that justifies the premium slows, and a stock the value methods already call full re-rates toward where they sit rather than where the growth method reaches.
Valuation
Inverted on operating income, ADP looks reasonable rather than stretched. At $218.40 (as of June 27, 2026) the price works out to about 15 times company-wide operating income, which implies roughly 4.4% annual operating growth over five years and sits in the lower half of the peer multiple range. For a business that has grown revenue in the mid-to-high single digits and earnings faster, asking for only 4.4% growth is a modest bar, and that is the heart of the case that the price is fair rather than rich.
The families of methods tell the more nuanced story. The static lenses, asset value, normalized earnings power, and peer multiples, all read ADP as fully to richly valued, and only the forward-growth method comfortably reaches the price. That is the classic profile of a high-quality compounder: the methods grounded in trailing book and normalized earnings cannot capture the durability of the franchise, so they understate it, while the growth-based methods that credit continued mid-single-digit compounding land at or above the price. The asset methods are particularly unreliable here because ADP's book value is tiny against a 65%-plus return on equity, the value is the embedded customer base and the float, neither of which sits on the balance sheet at anything like its economic worth. So the pattern, only growth reaches the price, is less a warning than a description of what kind of business this is.
Solvency is a non-issue and removes any downside-resilience question. Net debt is barely a tenth of a year's operating income, interest is covered more than thirteen times, the company is not burning cash, and it funds a long-growing dividend and buybacks out of abundant free cash flow. One nuance worth keeping straight: ADP holds large balances of client payroll funds, but those are client money held in trust, not corporate debt, and they are the source of the float income rather than a leverage risk. The downside is bounded by the recurring, mission-critical nature of the revenue; the question for the price is durability of growth, and the value methods say the premium is reasonable so long as employment and the float hold up.
Catalysts
The recent print was a clean beat-and-raise. In the third quarter of fiscal 2026, revenue rose 7% to $5.9 billion, 6% on an organic constant-currency basis, net earnings rose 9% to $1.4 billion, and adjusted diluted EPS rose 10% to $3.37. ADP raised its full-year fiscal 2026 guidance to revenue growth of 6% to 7% and adjusted diluted EPS growth of 10% to 11%. Management pointed to ongoing demand for AI-enabled human-capital tools and rising payroll and compliance complexity as the drivers, the structural tailwinds behind the steady compounding.
The macro backdrop is the catalyst ADP does not control. Because its revenue scales with employment and a slice of its earnings comes from interest on client funds, the labor market and the rate environment set the tone underneath the company-specific execution. A strong hiring economy and elevated rates flatter both the billable base and the float; a downturn would pressure both at once, so the monthly employment data and the rate path are effectively part of ADP's earnings outlook.
Sentiment is mixed and clustered near the price. The consensus rating sits around Hold to mildly positive, with average targets ranging from roughly the mid-$240s to the mid-$260s above the current price, though some firms trimmed targets after the third-quarter print and Wells Fargo upgraded only to Equal Weight with a target below the market price. That spread captures the standoff: few doubt the quality of the franchise, but with the static methods already calling it full, the debate is whether to pay a premium for durability or wait for a cheaper entry.
Peer Cohorts (Per Segment, With Filing Citations)
Employer Services (reported)
- PAYX (Paychex, Inc.)
- (no filing in the citation store)
- PAYC (Paycom Software, Inc.)
- (no filing in the citation store)
- PCTY (PAYLOCITY HOLDING CORPORATION)
- (no filing in the citation store)
- WDAY (Workday, Inc.)
- (no filing in the citation store)
PEO Services (reported)
- PAYX (Paychex, Inc.)
- (no filing in the citation store)
- PAYC (Paycom Software, Inc.)
- (no filing in the citation store)
- PCTY (PAYLOCITY HOLDING CORPORATION)
- (no filing in the citation store)
- WDAY (Workday, Inc.)
- (no filing in the citation store)
- TNET (TRINET GROUP, INC.)
- (no filing in the citation store)
- CTSH (COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION)
- (no filing in the citation store)
- EPAM (EPAM SYSTEMS, INC.)
- (no filing in the citation store)
- WIT (WIPRO LIMITED)
- (no filing in the citation store)
Article Insight (Recent News Sentiment)
Sentiment score: 55.00 (MEDIUM confidence) FUD/Hype: NONE Claim alignment: MIXED
The articles collectively present a mixed signal, largely confirming recent performance data while offering little directional insight beyond the existing analyst consensus.
Stifel Nicolaus Sticks to Its Hold Rating for Automatic Data Processing (ADP)
- Scope: Reports Stifel Nicolaus maintaining a Hold rating with a $240.00 price target.
- Data: Analyst David Grossman has an average return of -0.2% and 44.57% success rate.
- Verdict: Irrelevant to the thesis; a Hold rating is not a strong signal.
Analysts Offer Insights on Technology Companies: Automatic Data Processing (ADP), Everspin Technologies (MRAM) and Euronet Worldwide (EEFT)
- Scope: Summarizes analyst ratings across three companies, including ADP.
- Data: Mizuho Securities maintains a Buy rating with a $305.00 price target.
- Verdict: Challenges the base case; the $305 target exceeds our fair value.
ADP: Fiscal Q3 Earnings Snapshot
- Scope: Reports Q3 FY2026 results, beating consensus estimates for both EPS and revenue.
- Data: Q3 EPS of $3.37 versus consensus of $3.28, revenue of $5.94B versus $5.86B.
- Verdict: Validates the Q3 print detailed in the original analysis.
Methodology Note
- Priced-in inversion: the valuation is inverted on the current price to recover the operating-income growth, duration, and steady-state margin the price embeds (ROE for financials, FFO growth for REITs).
- Valuation x-ray: the valuation models, grouped into four families (asset, earnings, relative, growth). Each model is expressed as a price/FV ratio (distance from price), not a point fair-value estimate. The spread across families is the disagreement.
- Solvency: net cash/debt, net-debt-to-NOPAT, interest coverage, and share-count CAGR from EDGAR financials (net debt / FFO and fixed-charge coverage for REITs; regulatory-capital framing for financials).
- Peer cohorts: per-segment comparables with deep-linkable SEC filing citations.
Fundamentals sourced from SEC EDGAR filings. Current price from Databento. The priced-in inversion and valuation x-ray are computed by the boothcheck engine; narrative composed by AI from the structured data.
Sources
ADP Q3 FY2026 results · company FY2026 guidance, 2026 · analyst consensus and Wells Fargo note, 2026