Automatic Data Processing, Inc. (ADP): A Bull Case Theory

We came crossed a bullish thesis on Automatic Data Processing, Inc. connected Business Model Mastery’s Substack by The Antifragile Investor. In this article, we volition summarize the bulls’ thesis connected ADP. Automatic Data Processing, Inc.'s stock was trading astatine $257.07 arsenic of January 13th. ADP’s trailing and guardant P/E were 25.94 and 24.04 respectively according to Yahoo Finance.

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ADP is positioned arsenic a precocious quality, ngo captious services institution built astir payroll, quality superior management, and compliance, with a concern exemplary defined by recurring revenue, scale, and heavy lawsuit entrenchment. The halfway of ADP’s net powerfulness comes from Employer Services, wherever clients wage recurring fees for payroll processing, taxation filing, and indispensable HR functions that indispensable run flawlessly each wage cycle.

This “must work” quality is reflected successful a 92.1 % gross retention rate, showing that customers seldom permission erstwhile onboarded. A second, often misunderstood nett operator is involvement income earned connected lawsuit funds. Employers nonstop payroll currency to ADP earlier it is distributed to employees and governments, allowing ADP to gain involvement connected astir $31 cardinal of held funds, generating astir $1.2 cardinal of precocious borderline income successful fiscal 2025.

ADP besides operates a co employment exemplary done its PEO segment, wherever reported gross appears inflated due to the fact that benefits costs travel done the company, portion existent economical gross and margins are little but inactive meaningful. Geographically, the concern is planetary but remains predominantly U.S. based, with planetary payroll adding complexity that strengthens lawsuit reliance and creates agelong word borderline enlargement opportunities arsenic standard builds.

Financially, ADP converts net to currency efficiently, producing astir $4.9 cardinal successful operating currency travel connected $4.1 cardinal of nett income with minimal superior spending, reinforcing the durability of the model. The company’s moat is anchored successful switching costs, regulatory complexity, spot built from handling monolithic lawsuit money balances, and a wide organisation web that consistently generates caller lawsuit wins.

While margins tin fluctuate modestly owed to concern successful sales, product, and implementation, these pressures bespeak reinvestment to support a profoundly embedded and resilient franchise alternatively than structural weakness.

Previously, we covered a bullish thesis connected ADP by David successful November 2024, which highlighted the company’s ngo captious payroll platform, interval driven involvement income, and antiaircraft currency generation. The company’s banal terms has depreciated by astir 15.62% since our coverage. This is due to the fact that valuation multiples compressed contempt unchangeable fundamentals. This is due to the fact that recurring revenue, retention, and currency travel durability stay intact. The Antifragile Investor shares a akin presumption but emphasizes concern quality, conception economics, and moat durability.