AUTOMATIC DATA PROCESSING INC (ADP) stock intrinsic value fair value estimate & owner earnings analysis

ADP is a leading US payroll and human-capital-management provider. It runs payroll, tax filing, time and benefits software for employers of all sizes (Employer Services, $13.5B of fiscal 2026 revenue) and acts as a co-employer for smaller clients (PEO Services). Fiscal 2026 (June year-end) revenue was $21.9B, net earnings $4.4B and operating cash flow $5.4B. Clients rarely leave: client revenue retention was 92.1%, new business bookings grew 6%, and revenue has risen every year for the past ten years, with the slowest year (fiscal 2021, the pandemic) still up 2.8%. ADP also holds and invests client payroll and tax money (about $40B on average), which earned $1.35B of interest revenue in fiscal 2026 at an average yield of 3.4%. How we measured earnings. We start from cash flow from operations and take out three things: swings in receivables, payables and accrued expenses (timing, not economics), stock compensation (a real cost, $243M in fiscal 2026), and the part of capital spending needed just to stay in business (equipment plus capitalized software, $665M in fiscal 2026, of which about $47M was judged to be growth spending). We deliberately did not strip out ADP's capitalized contract costs (such as sales commissions): ADP pays these in cash every year ($1.3B in fiscal 2026), and only their non-cash amortization is added back in reported cash flow, so removing them would have overstated earnings by about $1.3B. On this basis earnings per diluted share rose from $3.04 in fiscal 2017 to $10.35 in fiscal 2026 (fiscal 2024 $8.20, fiscal 2025 $9.71). Roughly $385M a year of amortization of intangibles is added back as a non-cash charge; we handled the wasting nature of those assets in the growth path (no growth is credited from acquisitions, and the $468M of capitalized software spending is charged as a cost) rather than by lowering the earnings level. Starting level. Because ADP has debt, we value the business first and then subtract what it owes. To do that we add back the interest on corporate debt (about $141M in fiscal 2026), which gives business cash flow of $8.37, $9.99 and $10.70 per share for fiscal 2024, 2025 and 2026. We use the middle of those three years, $9.99, because they all reflect today's interest-rate environment on client funds, whereas earlier years reflected near-zero rates and a smaller float. We then remove about $0.15 per share for roughly $60M of interest earned on cash that we count separately below, giving a starting level of $9.84 per share. Growth check: business cash flow grew 5.7% in fiscal 2026 in total (7.1% per share, helped by share buybacks). Our base case assumes 5.0% in year one, below both, and does not credit buybacks. Base case: $269.56 per share. The business is worth about $110.5B ($273.92 per share) and net debt is about $1.76B ($4.36 per share). Growth is 5.0% in years 1-2, 4.5% in years 3-4, 4.0% in years 5-6, 3.5% in years 7-8 and 3.0% in years 9-10, then 1.5% a year afterwards. What puts this growth in the bag: pricing increases, 92% retention and steady new-client bookings are a process ADP has run for decades, including through recessions; revenue has never grown less than 2.8% in the last ten years, so a 1.5% long-run rate sits well below the worst demonstrated year. What we left out: share buybacks, acquisitions, new products and any margin expansion, none of which is contracted or a repeatable step we can size. Bear case: $168.90 per share. The business is worth about $69.9B ($173.26 per share) and net debt is $4.36 per share. The named risk is client-fund income: average yields rose to 3.4% in fiscal 2026; if yields fall by about 1.4 percentage points over the next few years on roughly $40B of balances, pre-tax income falls by about $560M, which we model as a cut of roughly 10% to the earnings level over three years. Beyond that we assume only 2% growth for ten years (below the slowest revenue growth of the last ten years) and none afterwards. Even here the business earns far more than its interest bill (about $141M a year). Bull case: $366.60 per share. The business is worth about $149.6B ($370.96 per share) and net debt is $4.36 per share. Growth runs at 7% in years 1-3, 6% in years 4-5, 5% in years 6-7, 4% in years 8-9 and 3% in year 10, then 2.5% afterwards, still below the slowest year in the record. The initial 7% is below the roughly 8.7% a year at which business cash flow grew from fiscal 2020 to 2026. It assumes bookings growth near 6%, retention near 92% and pricing continue, and that WorkForce Software (acquired in October 2024 for about $1.17B in cash, already paid for) is integrated successfully. Debt and cash. ADP owes $5.0B of senior notes: $1.0B at 1.70% due May 2028, $1.0B at 1.25% due September 2030, $1.0B at 4.75% due May 2032, $1.0B at 4.45% due September 2034 and $1.0B at 5.00% due May 2036 (the last issued in the fourth quarter of fiscal 2026). Nothing matures before May 2028 and the interest is easily covered, so refinancing is not a concern in any case. Because the two low-coupon notes cost far less than 6%, we count the debt at about $4.49B rather than $4.97B. Against that we count $2.73B of the $4.23B of corporate cash, keeping $1.5B for operations. In fiscal 2026 ADP paid $4.7B in dividends and buybacks, more than our measure of earnings ($4.2B) though close to cash flow after capital spending ($4.8B). What would make this wrong. A faster or larger fall in interest rates than the bear case assumes; retention falling well below 92% or an employment downturn combined with pricing pressure; or a large acquisition that destroys value. We tested the float assumption against ADP's own disclosure: a 0.25-point change in rates moves pre-tax earnings by only about $21M over twelve months, which supports treating float as a real but not dominant exposure. Change since our last analysis (August 2026): estimates were $170 bear, $248 base and $341 bull. The bear case is essentially unchanged. Base and bull rise because we now discount all cases at a flat 6%, credit only growth ADP has demonstrated, and no longer let the rate-driven float tailwind dominate the story; the float is charged in the bear case. ADP's underlying business did not change materially.