VALUATION HIGHLIGHTS

1. Payroll Processing constitutes 57% of the Trefis price estimate for ADP's stock.
2. HR Outsourcing & Other Services constitute 26% of the Trefis price estimate for ADP's stock.
3. Client Funds Interest constitutes 17% of the Trefis price estimate for ADP's stock.

WHAT HAS CHANGED?

ADP's Q1 FY'24 Results

ADP posted a mixed set of Q1 2024 results. While revenue missed expectations, coming in at $4.5 billion, earnings beat estimates coming in at $2.08 per share, up 12% from the year-ago period. Growth was driven by expanding new business bookings, strong client revenue retention, and higher client funds interest revenue.

Note: ADP's Q1 FY'24 ended on September 30, 2023.

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 an estimated 980,000 in FY'22 to 1,100,000 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 19% in FY'18 to 28% in FY'22. We forecast the EBITDA margin to increase to about 29% 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 30% 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 has fallen from 4.0% in 2009 to 1.5% in 2021. However, as the Fed continues to increase its interest rates, we forecast ADP's Average Interest Rate to increase to over 2% 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%.

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. As of June 30, 2022, ADP had more than 990,000 clients.

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 fee per client for ADP.

KEY TRENDS

Declining unemployment rates in the U.S.

During the recession, unemployment rates in the U.S. increased drastically as many businesses laid-off employees to reduce costs. The U.S. unemployment rate peaked at 10% in October 2009. However, driven by a recovery in the U.S. economy, businesses have begun hiring again. Since October 2009, the unemployment rate has been declining month on month. In August 2019, the unemployment rate remained at 3.7%. While Covid-19 caused a temporary rise in unemployment, the job market has recovered very strongly since, with the unemployment rate standing at just 3.5% in September 2022.

Declining 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

Interest rates in the U.S. have been low due to the Quantitative Easing program undertaken by the government to promote growth in the economy. As the U.S. economy started registering sustained growth, the Fed ended its Quantitative Easing program in 2021. Subsequently, Fed has raised interest rates to curtail inflation.

Complexities in the Affordable Care Act will force businesses to take advice from professionals

The recently introduced Affordable Care Act in the U.S. has certain complexities that will force businesses to take advice from professionals. ADP has proactively taken steps and has begun to offer solutions that will help clients navigate through these complexities. As more businesses look for such solutions, ADP's clients will increase.