AUTOMATIC DATA PROCESSING INC (ADP): what the price assumes

In the published model solve dated 2026-Q2, anchored at $287.48, AUTOMATIC DATA PROCESSING INC (ADP) is priced for +12.3% growth. boothcheck publishes no house fair value, target price, or buy/sell rating; individual model outputs and user-controlled scenarios are analytical inputs, not Boothcheck targets. Narrative composed 2026-07-25.

Generated: 2026-08-30 · Source: https://boothcheck.com/report/ADP

Headline

What The Price Assumes (Inversion)

The assumption today's price embeds, recovered by inverting the valuation.

The operating-margin figure is value-band context at year 12: derived from the framework's value band, a separate calculation — not part of the priced-in solve.

Solve inputs: computed at a 8.9% cost of capital with 4% terminal growth over a 5-year stage.

How unusual the bet is: n/a

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.

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=13)

Economic-Unit Decomposition (Sum Of The Parts)

One or more material disclosed units has unresolved economics. Unknown/general is not evidence of homogeneity: segment SOTP is primary but incomplete, consolidated cash flow may remain only a secondary cross-check when every unit shares an enterprise basis, and one sector multiple or target margin is withheld.

No total common-equity value is stated. One or more material units lack a supported unit value. The displayed values are an indicative subtotal; consolidated debt and cash cannot be applied to a fraction of the company.

Solvency

Bullet Takeaways

• Payroll is the product, but the money in transit is a second business: ADP invests the funds it holds for clients through a portfolio the FY2025 10-K calls "structured to allow us to average our way through an interest rate cycle by laddering the maturities of our investments", which is why both revenue and margin move with short rates.

• Employer Services carries about two thirds of revenue and PEO Services the other third, and the filing puts average client life at roughly 13 years in the former and 6 in the latter, so the live risk is not defection but the employment cycle underneath, which cuts per-employee fees and the invested client balance at the same time.

• The fiscal fourth quarter lands July 29, 2026, and the specific test is whether the 6% to 7% full-year revenue growth management moved up to in April survived the June quarter.

Bull Case

Most companies would like to hold other people's money and cannot. Running payroll means collecting from the employer before the employees and the tax authorities get paid, and that timing gap leaves a balance sitting on the books. ADP invests it. The FY2025 10-K describes the method without drama: the client funds investment strategy is "structured to allow us to average our way through an interest rate cycle by laddering the maturities of our investments" out to five years in the extended portfolio and out to ten years in the long one. The laddering is the part that matters. It means the interest line does not reprice with the front of the curve each quarter; it drifts, which converts a rate-sensitive asset into something closer to an annuity with a long memory.

The client base behaves the way that structure implies. "Based on our retention levels in fiscal 2025, our client retention is estimated at approximately 13 years in Employer Services, and approximately 6 years in PEO." Thirteen years is not a customer relationship in the ordinary sense. It is an installed base. Payroll sits underneath almost every other system a company runs, feeding the general ledger, the benefits carriers and the tax filings, and the cost of leaving is counted in reconciliations rather than license fees. The same 10-K notes that some products are sold under longer-term contracts with "initial terms typically ranging from two to seven years", so a meaningful share of the base is contractually parked before retention behaviour even enters the picture.

That combination produces unusual returns on very little invested capital. Trailing operating margin runs at 27.7% on roughly $21.6B of revenue. Book value is only about $15.78 a share, so return on equity comes out near 68%. The high return says less about brilliance than about what the business owns: contracts, code, compliance infrastructure and a trust structure, not factories. The 10-K makes the last of those explicit, noting that "the ADP Client Trust and ADP Trust Bank provide client funds with a level of protection that most competitors cannot offer". Regulatory apparatus is a strange thing to call a moat, but a competitor cannot buy one, and a client who has already routed its tax remittances through it has little reason to test an alternative.

Placed against the cohort, the shape is distinctive rather than dominant on any single line. Paychex (PAYX) earns a higher operating margin, 36.9%, on $6.3B of trailing revenue, and grew 16.4% over the last year. Paycom (PAYC) and Paylocity (PCTY) are smaller and faster than ADP on revenue, growing 9.4% and 11.3%, on operating margins of 28.3% and 21.3%. Workday (WDAY), the largest of the group by revenue at $9.9B, converts far less of it, at a 10.4% operating margin. Retention across the group is genuinely high; Paylocity's own 10-K reports revenue retention "greater than 92% in each of fiscal 2023, 2024 and 2025". The bull argument is not that ADP wins any of those comparisons. It is that no one else is running $21.6B of revenue at a 27.7% margin with a 13-year average client life and a regulated funds business attached.

Growth arrives from several directions at once, which is what makes it steady rather than spectacular. The FY2025 10-K attributes the year's revenue increase to "new business started from new business bookings, strong client retention, an increase in zero-margin benefits pass-throughs, an increase in pricing, an increase in interest on funds held for clients". Two of those cost nothing to deliver. Pricing on an installed base of that duration compounds without a salesperson, and the interest line compounds without a client. Management has been returning the result rather than hoarding it: the share count has fallen about 1.1% a year over the four years to March 2026, which is buyback deployment showing up in the one place it cannot be dressed up.

Bear Case

Two of the drivers underneath ADP's recent results are running near the top of their cycles at the same time, and neither is under management's control. The first is employment. The 10-K states it directly: "Our business is also impacted by employment levels across our clients, as we have varied contracts throughout our business that blend base fees and per-employee fees." Per-employee fees fall when clients shed staff, and they fall without a single client leaving, which is why 13-year retention is a weaker defence than it sounds. The second is interest. A downturn hits both at once, and the filing says so: "When there is a reduction in employment levels due to a slowdown in the economy, the Company may experience a decline in client fund obligations". The invested balance shrinks in the same quarter the fee line softens, and the interest income earned on it shrinks with it.

That matters because the price is not asking for anything dramatic; it is asking for something uninterrupted. At $250.09 the market is capitalising company-wide operating income at roughly 17 times, which requires operating profit to compound at about 7.8% a year and to keep doing it across a five-year run. On its own recent record ADP has grown operating profit nearer 6.6%. The gap is a little over a point, and that is precisely the difficulty. The demand is not heroic, it is relentless: five consecutive years without a soft one, in a business whose own filing lists interest on client funds and zero-margin benefits pass-throughs among the drivers of the last good year. If growth settles at the recent pace instead, the multiple has to absorb the shortfall, and the peer-multiple and earnings-power approaches both land far below today's price.

The arithmetic is also unusually sensitive to the required return. One additional percentage point of cost of capital raises the growth rate the price needs by roughly 5.4 points, which is a large answer to a small input. Practically, that means the assumption doing the most work here is not ADP's execution but the discount rate the market applies to it, and that rate is not something the company can defend by selling more payroll.

Regulation sits on the same pressure point. The risk factors note that "Changes in laws or regulations could also cause us to modify our client funds investment strategy, which may reduce the interest income earned on such funds." A rule change to how client money may be invested would not touch a single client relationship and would still remove revenue that carries almost no cost, which is the worst kind of revenue to lose.

On competition, the filing is honest to the point of dryness: "We know of no reliable statistics by which we can determine the number of our competitors", though it believes it is among the largest providers in the world. The cohort numbers say the field is not standing still. Paychex (PAYX) grew revenue 16.4% over the last year at a 36.9% operating margin, both ahead of ADP on the growth line and on conversion. Paycom (PAYC) and Paylocity (PCTY) are compounding at 9.4% and 11.3% from smaller bases, and TriNet (TNET), the closest listed comparison to the co-employment side, shrank 2.4% with a 3.2% profit margin, which is a fair indication that PEO economics are the harder half of ADP's business rather than the easier one.

The bull answer to all of this is real: the base is sticky, the pricing is contractual, and the interest exposure is laddered specifically so that no single year of rates decides the outcome. That is true, and it slows the damage rather than preventing it. A ladder that averages a rising rate cycle into the results on the way up averages a falling one into them on the way down. What the price is buying is five years of that averaging going the right way, on a business that has recently grown operating profit slightly slower than the price requires.

Valuation

Begin with what $250.09 has to assume. The price capitalises company-wide operating income at about 17 times, and carrying that forward requires operating profit to grow roughly 7.8% a year before settling into a 4% terminal pace, discounted at a cost of capital near 9%. Against ADP's own recent record of about 6.6%, the required rate is not extreme. What makes it demanding is that the pace has to hold across a five-year run rather than show up in one good year. Relative to the payroll and human capital cohort the multiple itself sits in the lower half of the peer range, so what is being paid for here is not obviously a crowd effect.

The methods used to triangulate that price disagree in a readable pattern. The cash-flow approaches land closest, with today's price about 8% above the middle of that group, and the two discounted cash flow constructions inside it actually reach past the price. Everything else sits well below. The peer multiple methods place the price about 58% above where they land, and the asset value and earnings power methods put it 70% to 80% above. That configuration, where only forward cash-flow methods reach the price and the static frames do not, describes a durability premium. The trailing methods can only value what ADP has already earned; none of them has a mechanism for a client that stays 13 years and absorbs an increase along the way.

The size of that premium is easiest to see with growth switched off. Over the trailing year ADP produced free cash flow of 5.45 billion dollars. Capitalise that at a 9.3% cost of equity, assume the business never grows again, and roughly two fifths of today's share price is left over as payment for growth that has not yet happened. One discounted cash flow construction does reach today's level, and it is worth knowing how. It starts from a free cash flow base of 5.6 billion dollars, grows it 7% a year, settles at 4% in perpetuity and discounts at 8.9%. Neither input is aggressive on its own. They simply both have to hold for the length of the projection.

Two filing-reported inputs sit underneath all of it. The first is contract duration: some products are sold under agreements with "initial terms typically ranging from two to seven years", which is why the revenue base is steady enough for a cash-flow lens to be the right one here at all. The second is where last year's margin came from. "Employer Services' margin increased in fiscal 2025 due to contributions from operating efficiencies for costs of servicing and implementing our clients on growing revenue, and client funds interest revenues". Efficiency and interest are not the same quality of margin. One persists; the other is on loan from the rate cycle.

Cohort position sharpens the picture without settling it. Paychex (PAYX) converts 36.9% of $6.3B of revenue into operating profit and grew 16.4%; ADP converts 27.7% of $21.6B and grows slower. Scale is what ADP has and Paychex does not, and margin is the reverse. Workday (WDAY), with $9.9B of trailing revenue and a 10.4% operating margin, shows what the same market looks like when the operating model is still being paid for.

The balance sheet is not what decides this one. Operating profit covers interest expense about 14.8 times over, funded debt is small next to a single year's operating profit, the business is not consuming cash, and the share count has fallen about 1.1% a year over the four years to March 2026. Whatever goes wrong at this price will show up as a multiple that compressed, not as a company that ran out of room.

Catalysts

The next dated event is close. ADP reports its fiscal fourth quarter and full fiscal 2026 before the market opens on July 29, 2026, with a call the same morning. The company no longer distributes results over a newswire and posts them to its investor relations site instead, so the release itself is the event rather than the wire crossing.

April's third-quarter print is the reason the bar is where it is. Revenue rose 7% to $5.9 billion, net earnings rose 9%, and GAAP diluted earnings per share rose 10% to $3.38 for the quarter. Management then raised its fiscal 2026 targets, moving to revenue growth of 6% to 7% and diluted earnings per share growth of 10% to 11% for the full fiscal year. Raising a full-year target with one quarter left is a narrow commitment, which makes the July print a straightforward pass or fail rather than a matter of interpretation.

Two lines inside that release will carry more information than the headline. The first is interest on funds held for clients, because it moves with rates and with the size of the client payroll base rather than with sales execution, and it fed both revenue and Employer Services margin in the last fiscal year. The second is new business bookings, which is where a slowdown in small business hiring would appear first, ahead of any change in retention. Analysts polled ahead of the print expect fiscal fourth-quarter diluted earnings per share of $2.59 against $2.26 in the same quarter a year earlier.

Peer Cohorts (Per Segment, With Filing Citations)

Employer Services (reported)

• PAYX (Paychex, Inc.)
• FY2025 10-K: …an impact on the Company's financial condition, results of operations, or cash flows. The Company is currently evaluating the impact of adopting this ASU on its disclosures. Note B - Service Revenue Service revenue is primarily attributable to fees for providing services to the Company's clients and is recognized…
• FY2025 10-K: Management Solutions revenue is generally recognized over time as services are performed and the customer simultaneously receives and controls the benefits from these services. Revenue earned from delivery service for the distribution of certain client payroll checks and reports is also included in Management…
• PAYC (Paycom Software, Inc.)
• FY2025 10-K: …greater financial flexibility and transparency to better meet life's demands. It also provides employers a competitive edge in hiring and retaining employees with a benefit today's employees want. Everyday is fully automated, calculating and withholding taxes, benefits and deductions first to protect against…
• FY2025 10-K: …employees purchase shares of the Company's common stock at a price equal to 85 % of the fair market value of the shares on the exercise date. The maximum number of shares that may be purchased by a participant during each offering period is 2,000 shares, subject to limits specified by the Internal Revenue Service.…
• PCTY (PAYLOCITY HOLDING CORPORATION)
• FY2025 10-K: …and retain the right talent to grow our organization, while being consistent and equitable. Our total rewards program includes competitive pay, a restricted stock program, an employee stock purchase program, market competitive retirement benefits, paid time off and many other benefits. We offer employees the ability…
• FY2025 10-K: …and file the necessary tax withholdings and filing documents for local, state and federal jurisdictions. Global Payroll - Our cloud-based global payroll solution enables U.S.-based companies to manage payroll for employees outside the U.S. in line with complex local and country-specific requirements across over 100…
• WDAY (Workday, Inc.)
• FY2025 10-K: …program, including 12 new Industry Accelerators announced during fiscal 2025, combines Workday partners, solutions, and services to help speed cloud transformation efforts tailored to solve our customers' industry-specific challenges. Customers We sell to emerging, medium-sized, and large global organizations that…
• FY2025 10-K: …impact us, see "Risk Factors" included in Part I, Item 1A of this report. Available Information Our website is located at www.workday.com and our investor relations website is located at www.investor.workday.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other…

PEO Services (reported)

• PAYX (Paychex, Inc.)
• FY2025 10-K: Management Solutions revenue is generally recognized over time as services are performed and the customer simultaneously receives and controls the benefits from these services. Revenue earned from delivery service for the distribution of certain client payroll checks and reports is also included in Management…
• FY2025 10-K: …PEO Solutions revenue is included in service revenue and is reported net of certain pass-through costs billed and incurred, which include payroll wages, payroll taxes, including federal and state unemployment insurance, and certain health insurance benefit premiums, primarily costs related to our guaranteed cost…
• PAYC (Paycom Software, Inc.)
• FY2025 10-K: -gaap:RestrictedStockMember payc:TwoThousandAndTwentyThreeLongTermIncentivePlanMember 2025-01-01 2025-12-31 0001590955 us-gaap:PerformanceSharesMember srt:ExecutiveOfficerMember 2025-02-10 2025-02-10 payc:Segment iso4217:USD xbrli:shares xbrli:pure xbrli:shares iso4217:USD UNITED STATES SECURITIES AND EXCHANGE…
• FY2025 10-K: …strategies and setting up plans and features within our benefits software offering. The coordinator helps reconcile enrollment and deductions to prepare the client for a successful first payroll of the new plan year. COBRA Administration . Our COBRA administration tool and service helps protect employers from COBRA…
• PCTY (PAYLOCITY HOLDING CORPORATION)
• FY2025 10-K: …and retain the right talent to grow our organization, while being consistent and equitable. Our total rewards program includes competitive pay, a restricted stock program, an employee stock purchase program, market competitive retirement benefits, paid time off and many other benefits. We offer employees the ability…
• FY2025 10-K: …and to build loyalty by developing strong relationships with them. We strive to achieve high revenue retention, in part, by delivering high-quality service. Our revenue retention was greater than 92% in each of fiscal 2023, 2024 and 2025. Each client is assigned an account management team that serves as the central…
• WDAY (Workday, Inc.)
• FY2025 10-K: …applications for financial management, spend management, human capital management, planning, and analytics, with routine customer support. Revenues are generally recognized on a ratable basis over the contract term beginning on the date that our service is made available to the customer. To date, we have not…
• FY2025 10-K: …to our customers. Subscription services are made up of a daily requirement to deliver the service to the customer. Each day the delivery of the service provides value to the customer and each day represents a measure toward completion of the service. As such, subscription services meet the criteria to be a series of…
• TNET (TRINET GROUP, INC.)
• FY2025 10-K: …and improve client retention and satisfaction over the long term. In 2025, we continued to develop our next-generation cloud-based platform. This new platform, which combines elements of our original PEO and ASO platforms, is intended to further modernize our customers' experience through more self-service…
• FY2025 10-K: …provider for SMBs. TRINET 9 2025 FORM 10-K BUSINESS Table of Contents Our Competitors We face competition from: • PEOs that compete directly with us, • payroll processing agents and other HCM services providers that do not use a PEO model, • HR and personnel of companies that administer employee benefits, payroll and…
• CTSH (COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION)
• FY2025 10-K: …and insurance companies. Demand in this segment is driven by our clients' need to modernize legacy technology environments, strengthen operational resilience and adopt cloud, data and AI capabilities to meet evolving customer expectations and regulatory requirements. Our clients are expanding enterprise AI adoption…
• FY2025 10-K: …ctsh:FinancialServicesMember 2025-01-01 2025-12-31 0001058290 us-gaap:TimeAndMaterialsContractMember ctsh:ProductsandResourcesMember 2025-01-01 2025-12-31 0001058290 us-gaap:TimeAndMaterialsContractMember ctsh:CommunicationsMediaandTechnologyMember 2025-01-01 2025-12-31 0001058290…
• EPAM (EPAM SYSTEMS, INC.)
• FY2025 10-K: …for modern platforms including web media streaming, mobile information delivery, print to digital transformations and information discovery and search. Our solutions aid our clients in developing new revenue sources, accelerating content management, delivery and monetization, and reaching broader audiences. We serve…
• FY2025 10-K: …which are compliant with ISO 27001, ISO 27701 and ISO 9001 standards. For certain services, EPAM obtains SOC1, SOC2, and/or SOC3 reports and shares them with our clients. These audits are performed by an independent auditor utilizing globally recognized attestation standards (ISAE 3402 and ISAE 3000). Our SOC…
• 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.
• Economic-unit decomposition (SOTP): each disclosed business unit is assigned its native valuation basis before any multiple is applied. Operating units are valued on enterprise value; funded financial units are valued on their own common equity, because their borrowings fund earning assets rather than levering the parent. A company total is stated only once every material unit carries a supported value and the parent capital bridge reconciles.
• 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.