ADP Automatic Data Processing
Superb toll-road franchise, but at 260 the market pays for growth the fundamentals haven't delivered.
The story
ADP is the dominant US payroll and HCM processor, with very sticky clients, scale economics in compliance and tax filing, and a large client-funds float that earns interest income. It is a mature franchise that still compounds: high single-digit revenue growth from pricing, pays-per-control and modest share gains in PEO and international, with margins expanding slowly. Its moat is durable, but growth is decelerating as employment growth cools and cloud-native rivals (Paylocity, Paycom, Rippling, Workday) compete for mid-market and enterprise clients.
Growth, margin, beta and terminal growth are unchanged: TTM revenue growth of 6.8% and a 28.2% margin track the prior story, and the price rise from 216 to 260 does not change the facts. I raised sales-to-capital from 1.45 to 1.7 (+17%) because reported TTM capital efficiency is about 2.0, but I stopped short of 2.0 since client-fund and acquisition capital make the reported figure overstate it. The 10-year horizon reflects a durable moat, but not 15 years, given rate-sensitive float and slowing employment growth.
Value drivers
| Revenue growth (Y1) | 7.0% |
| Terminal growth | 3.5% |
| Forecast horizon | 10y |
| Target operating margin | 29.5% |
| Years to target margin | 7 |
| Sales-to-capital | 1.70 |
| Beta | 0.95 |
| Failure probability | 0.5% |
| Cost of capital (WACC) | 9.4% |
| Terminal WACC | 9.6% |
Valuation bridge
| PV of explicit FCFF | 35.72B |
| PV of terminal value | 44.60B |
| Equity value | 79.19B |
| ÷ shares → per share | $199.85 |
Projected free cash flow to the firm
| Yr | Revenue | Growth | Margin | NOPAT | Reinvest | FCFF | PV |
|---|---|---|---|---|---|---|---|
| 1 | 23.48B | 7.0% | 28.4% | 5.13B | 903.72M | 4.23B | 3.87B |
| 2 | 25.04B | 6.6% | 28.6% | 5.51B | 913.26M | 4.60B | 3.84B |
| 3 | 26.59B | 6.2% | 28.8% | 5.89B | 916.36M | 4.97B | 3.80B |
| 4 | 28.15B | 5.8% | 28.9% | 6.27B | 912.55M | 5.36B | 3.74B |
| 5 | 29.68B | 5.4% | 29.1% | 6.66B | 901.39M | 5.76B | 3.68B |
| 6 | 31.18B | 5.1% | 29.3% | 7.04B | 882.58M | 6.16B | 3.59B |
| 7 | 32.63B | 4.7% | 29.5% | 7.41B | 855.87M | 6.56B | 3.50B |
| 8 | 34.03B | 4.3% | 29.5% | 7.73B | 821.16M | 6.91B | 3.37B |
| 9 | 35.35B | 3.9% | 29.5% | 8.03B | 778.45M | 7.25B | 3.24B |
| 10 | 36.59B | 3.5% | 29.5% | 8.31B | 727.85M | 7.59B | 3.09B |
Key risks
- Falling interest rates compress float income, which is high-margin and a material share of operating profit
- Weakening US employment reduces pays-per-control and PEO worksite growth
- Cloud-native HCM competitors push down pricing and retention in the mid-market
Catalysts
- Fed rate path and client-fund yield guidance in the next fiscal-year update
- Retention and new-business bookings trends showing whether AI-driven product upgrades defend share