VALUATION HIGHLIGHTS

1. Payroll Processing constitutes 61% of the Trefis price estimate for ADP's stock.
2. Client Funds Interest constitutes 20% of the Trefis price estimate for ADP's stock.
3. HR Outsourcing & Other Services constitute 18% of the Trefis price estimate for ADP's stock.

WHAT HAS CHANGED?

ADP's Q2 FY'25 Results

ADP posted a better-than-expected set of fiscal Q2 2025 results. While revenue beat expectations, coming in at $5 billion, marking a growth of 8% versus last year, adjusted earnings stood at $2.35 per share, up 10% versus last year. Growth was driven by expanding new business bookings, strong client revenue retention, and higher client funds interest revenue.

Note: ADP's FY'24 ended on June 30, 2024. Q2 FY'25 ended Dec 31 2024

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of ADP's value that present opportunities for upside or downside to the current Trefis price estimate for ADP:

Payroll Processing

• Number of Clients Served: We currently forecast the number of clients served by ADP's Payroll Processing division to increase going forward from 1,001,000 in FY'24 to 1,150,000 by the end of the Trefis forecast period. An increase in clientele is likely to occur because of improving economic conditions and ADP's efforts in acquiring clients through acquisitions and overseas expansion. However, there could be a 10% downside to the Trefis price estimate if ADP's client base remains flat.


• Payroll Processing EBITDA Margin : The EBITDA margin for ADP's payroll processing business has increased from 25.6% in FY'20 to 30% in FY'24. We forecast the EBITDA margin to increase to about 32% by the end of the Trefis forecast period because of ADP's ability to obtain sustained price increases from its clientele and improved operational efficiency. There could be a 7% upside to the Trefis price estimate if ADP's payroll processing EBITDA margin increases to 35% by the end of the forecast period.

Client Funds Interest

• Average Interest Rate: Due to the U.S. Federal Reserve Bank's quantitative easing, the Average Interest Rate for ADP fell from 2.1% in 2020 to 1.4% in 2022 although it rose to 2.9% in 2024. However, as the Fed continues to increase its interest rates, we forecast ADP's Average Interest Rate to increase to over 3% by the end of our forecast period. However, our price estimate could see a 5% upside if ADP's Average Interest Rate increases to about 3.5%.

For additional details, select a driver above or select a division from the interactive Trefis split for ADP at the top of the page.

BUSINESS SUMMARY

ADP offers payroll processing to businesses of varying sizes around the globe. Payroll processing includes the paper and electronic distribution of employee compensation along with the processing of tax withholdings and other employee contributions. Businesses save time and resources by outsourcing their payroll processing to companies like ADP.

SOURCES OF VALUE

Number of Payroll Accounts

The number of payroll accounts managed by ADP is an important driver of ADP's revenues. ADP had more than 1 million clients as of 2023.

Account Types and Fee Per Client

The company divides its US payroll business into three segments based on the number of employees in an account: National Accounts (1000+ employees), Major Accounts (50-999 employees), and Small Business Accounts (<50 employees). The Fee Per Client is an important metric as it shows how ADP's pricing power and the competitive scenario translate into the fees generated per client for ADP.

KEY TRENDS

Low unemployment rates in the U.S.

The job market has recovered very strongly since Covid-19, with the unemployment rate remaining around 4% since early 2024. Although the Fed has indicated that the unemployment rate would see an uptick to 4.4% in 2025, these levels are still relatively low. Low unemployment rates are beneficial to ADP since they will have a positive impact on its revenue and number of clients.

Interest rate environment to normalize

The Fed began hiking interest rates in early 2022 to combat high inflation rates taking rates to around 5% as of mid-2023. With inflation figures cooling off in recent quarters, the Fed started to cut rates in 2024 and has forecast two cuts in 2025.

Labor law changes can force businesses to take professional help

Evolving labor laws and compliance requirements could drive demand for expert guidance. ADP offers solutions that will help clients navigate through these complexities. As more businesses look for such solutions, ADP's clients will increase.