In short: BUY. ER 13.08%; fwd PE 17.3 vs 27.9 (38.0% under); RDCF 6.7% vs 6.0% (−0.7pp). YTD +5.5%.
In short: BUY. ER 12.98% on 6.03% EPS growth and a 2.5% yield; fwd PE 17.3 against a 27.9 average (38.0% under). The reverse DCF is the dissenting model: 6.7% required against 6.0% expected (−0.7pp).
In short: BUY. FV $313.4 vs $242.2 = 22.7% under; ER 13.3%; fwd PE 17.3 against 27.9 (38.0% under); RDCF 5.1% vs 6.0% — now positive, where June's was marginally negative. YTD −4.2%.
In short: #2 — "High switching costs, and a regulatory moat." Payroll, HR and human-capital software worldwide, plus "significant interest income by holding client funds before distributing them as payroll." Why it survives twenty years: "Moving a company's entire payroll and HR system is a massive headache, so management teams avoid it"; "people have to get paid no matter what"; and "taxes and regulations get more complex every year. Rather than risk huge fines doing it themselves, businesses gladly pay ADP to handle it."
ADP runs payroll. When a company pays its staff, ADP calculates the wages, withholds the right taxes, files the paperwork and moves the money — and briefly holds those funds in transit, earning interest on them along the way.
Three things make it hard to dislodge over twenty years. Changing payroll provider means migrating every employee record and every tax setting at once, with real legal consequences if anything breaks, so finance directors simply do not do it. Payroll is not optional in any economy — people have to be paid whether business is booming or terrible. And employment tax rules get more complicated every year, which most companies would rather pay someone else to worry about than risk a fine. Regulatory complexity, in other words, is not a cost to ADP; it is the reason customers stay.
In short: BUY. FV $302.8 vs $232.0 = 23.4% under; ER 13.4%; fwd PE 17.3 against 27.9 (38.0% under); RDCF 6.4% required vs 6.0% expected — marginally negative, the model tension in a low-growth compounder.
In short: BUY. EPS growth 6.03%, dividend 3.20%, FWD PE 17.3 against a fair exit 25, expected return 13.68%, fair value 287.3 against 214.1 = 25.47% undervalued.
In short: BUY. 18.2x forward against a 27.9x five-year average (34.8% under), a 3.1% dividend yield and a 12.9% expected return — but the reverse DCF is marginally negative at −0.4pp on only 6.0% expected growth. Down 17.1% year to date.
In short: One of three "why it might be interesting" write-ups. Recurring payroll and HR fees plus "significant interest on the billions of dollars they temporarily hold before paying them out to employees and tax authorities." "ADP has very high switching costs. Once a company trusts ADP with its taxes and payroll, they almost never leave." Capital-light with CAPEX/Sales below 2%. Held by Fundsmith (6.3%), Guardcap (3.8%) and Seilern (0.5%).
ADP runs payroll and HR for other companies. Two things make that a good business. First, it is extremely sticky: once a company has handed over its payroll and its tax filings, moving to a competitor risks paying people late or filing taxes wrong, so almost nobody moves. Second, ADP briefly holds the wages and tax money in transit — billions of dollars — and earns interest on it while it sits there.
It also needs almost no money to run: capital spending is under 2% of sales, so nearly all the profit is genuinely free cash. Three of the tracked quality funds own it, led by Fundsmith at 6.3% of its portfolio.
In short: Best Buy #3. Cloud payroll, HR and tax compliance for 1.1m clients — "pays 1 in 6 workers in the U.S.," average client tenure 13 years, retention 92.1%. Three engines: HCM technology and employer services (63.7%), PEO services (30.7%) and interest on ~$3.3trn of client funds held in transit (5.6%). Four reasons AI won't disrupt it: the world's most accurate real-time wage/tax dataset; no room for error (a miscalculated paycheck is a lawsuit or federal penalty); high switching costs; and internal efficiency via ADP Assist under CEO Maria Black (with ADP since 1996).
ADP runs payroll. It pays one in six American workers, serves 1.1 million businesses, keeps clients for 13 years on average and loses under 8% of them a year. It also earns interest on the roughly $3.3 trillion of client money that passes through its hands each year in the days between collecting payroll and paying it out — a quiet third revenue stream.
The AI-replacement argument runs aground on two hard facts here. First, ADP owns something a language model cannot conjure: decades of real, private wage and tax data covering a sixth of the American workforce. Second, payroll has no tolerance for a plausible-sounding mistake — get a tax rule wrong and the result is a lawsuit or a federal penalty, so no finance chief swaps a proven system for an unproven one to save a little money. Meanwhile ADP is using AI itself, under the "ADP Assist" banner, to automate its own compliance work — which widens margins and makes the product stickier at the same time.
In short: BUY. 23.4x forward against a 27.9x average (16.1% under), a 12.5% expected return from 9.2% growth plus a 2.6% yield, and a $339.3 fair value against $260.44. The payroll utility argued at length three days later in the software special.
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