ADP Earnings: Payroll Powerhouse Benefits From Resilient Retention and Interest Income Upside

We maintain our $228 fair value estimate for wide-moat ADP 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.

Top-line growth of 9% year on year during the quarter was in line with our expectations as stronger-than-anticipated retention and healthy—albeit moderating—employment growth was partly offset by softer-than-forecast demand for outsourced HR solutions via the Professional Employer Organization. As with payroll processor peers, ADP continues to benefit from greater contribution from ultra-high margin interest income revenue, bolstering 110 basis points of adjusted operating margin expansion to 27.8%. Profitability was also supported by favorable reserve adjustments and insurance costs in the PEO.

For full-year fiscal 2023, we forecast revenue growth of 8.5%, reflecting continued moderation of hiring activity for the remainder of the year as contractionary monetary policy curbs economic activity. We expect employment within the base to continue to soften into fiscal 2024, resulting in a further deceleration of revenue growth to 6.2%. While we anticipate hiring conditions to improve from fiscal 2025 as tight monetary policy unwinds, this will be partly offset by dwindling interest income tailwinds following a series of favorable rate rises.