Morningstar

ADP Earnings: AI-Driven Efficiency and Stronger Pricing Power Fuel Guidance Raise

We view ADP stock’s 6% pop after earnings as a move in the right direction.

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Securities in This Article
Automatic Data Processing Inc
(ADP)

Key Morningstar Metrics for Automatic Data Processing

  • Fair Value Estimate
    : $231.00
  • Morningstar Rating
    : ★★★
  • Morningstar Economic Moat Rating
    : Narrow
  • Morningstar Uncertainty Rating
    : Medium

What We Thought of Automatic Data Processing’s Earnings

Automatic Data Processing ADP reported third-quarter revenue up 7% year over year (6% organic constant currency) to $5.9 billion, while adjusted EBIT margin expanded 80 basis points to 30.2%, a strong result amidst AI disruption fears.

Why it matters: We thought current results should incrementally dispel AI disruption fears. Management raised its full-year fiscal 2026 guidance, citing higher-than-expected client funds interest balances, improved retention, and stronger pricing realizations.

  • The retention and pricing points are the most important. Stronger retention during the quarter was attributed to increasing client satisfaction, and management now expects a 130-basis-point contribution from price for the full year, up from the previously communicated 100 basis points.
  • Management specifically highlighted efficiency gains delivered to clients via better, AI-powered offerings, while also allowing ADP to become more efficient, citing a reduction in labor for tax validation of 35%. We believe this supports our decision to retain a moat for ADP after our review.

The bottom line: We are maintaining our $231 fair value for ADP, and we viewed shares as undervalued heading into earnings. We view the 6% pop after earnings as a move in the right direction, with 8% upside remaining to our fair value estimate.

  • Management now expects fiscal 2026 revenue growth of 6% to 7% (up from around 6% previously) and adjusted diluted EPS growth of 10%-11% (up from 9%-10% previously), and we would not be surprised if there is a beat baked into Q4 guidance as well.
  • A critical catalyst for fiscal 2027 will be the continued ramp of Lyric HCM, which is currently winning 70% of its deals from new logos, signaling a potential acceleration in enterprise market share capture. We’ll learn more when the 2027 guidance comes out next quarter.

Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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