ADP (ADP)

Payroll and HR services provider Automatic Data Processing (NASDAQ:ADP) announced better-than-expected revenue in Q3 CY2025, with sales up 7.1% year on year to $5.18 billion. The company expects next quarter’s revenue to be around $5.33 billion, close to analysts’ estimates. Its non-GAAP profit of $2.49 per share was 1.9% above analysts’ consensus estimates.

Company Overview

Processing one out of every six paychecks in the United States, ADP (NASDAQ:ADP) provides cloud-based human capital management solutions that help businesses manage payroll, benefits, talent acquisition, and HR administration.

A combination of increasing reliance on data and analytics across various industries and the desire for cost efficiency through outsourcing could mean that companies in this space gain. As functions such as payroll, HR, and credit risk assessment rely on more digitization, key players in the data & business process services industry could be increased demand. On the other hand, the sector faces headwinds from growing regulatory scrutiny on data privacy and security, with laws like GDPR and evolving U.S. regulations potentially limiting data collection and monetization strategies. Additionally, rising cyber threats pose risks to firms handling sensitive personal and financial information, creating outsized headline risk when things go wrong in this area.

ADP's main competitors include Paychex (NASDAQ:PAYX), Workday (NASDAQ:WDAY), Ceridian (NYSE:CDAY), and UKG (private), along with enterprise software providers like Oracle (NYSE:ORCL) and SAP (NYSE:SAP) that offer HR management modules.

Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years.

With $20.9 billion in revenue over the past 12 months, ADP is a behemoth in the business services sector and benefits from economies of scale, giving it an edge in distribution. This also enables it to gain more leverage on its fixed costs than smaller competitors and the flexibility to offer lower prices.

As you can see below, ADP’s 7.5% annualized revenue growth over the last five years was solid. This is a good starting point for our analysis because it shows ADP’s demand was higher than many business services companies.

We at StockStory place the most emphasis on long-term growth, but within business services, a half-decade historical view may miss recent innovations or disruptive industry trends. ADP’s annualized revenue growth of 6.9% over the last two years aligns with its five-year trend, suggesting its demand was stable.

This quarter, ADP reported year-on-year revenue growth of 7.1%, and its $5.18 billion of revenue exceeded Wall Street’s estimates by 0.9%. Company management is currently guiding for a 5.5% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 5.4% over the next 12 months, similar to its two-year rate. We still think its growth trajectory is satisfactory given its scale and suggests the market sees success for its products and services.

ADP has been a well-oiled machine over the last five years. It demonstrated elite profitability for a business services business, boasting an average operating margin of 24.8%.

Looking at the trend in its profitability, ADP’s operating margin rose by 3.7 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q3, ADP generated an operating margin profit margin of 25.8%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

ADP’s EPS grew at a remarkable 11.1% compounded annual growth rate over the last five years, higher than its 7.5% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into the nuances of ADP’s earnings can give us a better understanding of its performance. As we mentioned earlier, ADP’s operating margin was flat this quarter but expanded by 3.7 percentage points over the last five years. On top of that, its share count shrank by 5.5%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For ADP, its two-year annual EPS growth of 9.7% was lower than its five-year trend. This wasn’t great, but at least the company was successful in other measures of financial health.

In Q3, ADP reported adjusted EPS of $2.49, up from $2.33 in the same quarter last year. This print beat analysts’ estimates by 1.9%. Over the next 12 months, Wall Street expects ADP’s full-year EPS of $10.16 to grow 10.2%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

ADP has shown terrific cash profitability, enabling it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the business services sector, averaging 20.5% over the last five years.

Taking a step back, we can see that ADP’s margin expanded by 5.2 percentage points during that time. This is encouraging, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability.

ADP’s free cash flow clocked in at $595.6 million in Q3, equivalent to a 11.5% margin. The company’s cash profitability regressed as it was 4.3 percentage points lower than in the same quarter last year, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings. Long-term trends are more important.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

ADP’s five-year average ROIC was 60.8%, placing it among the best business services companies. This illustrates its management team’s ability to invest in highly profitable ventures and produce tangible results for shareholders.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Fortunately, ADP’s ROIC has increased significantly over the last few years. This is a great sign when paired with its already strong returns. It could suggest its competitive advantage or profitable growth opportunities are expanding.

ADP reported $7.94 billion of cash and $9.53 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $6.05 billion of EBITDA over the last 12 months, we view ADP’s 0.3× net-debt-to-EBITDA ratio as safe. We also see its $45.1 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was good to see ADP narrowly top analysts’ revenue expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. On the other hand, its revenue guidance for next quarter was just in line, showing that this quarter's business momentum isn't carrying over as strongly into next quarter. Zooming out, we think this was a mixed quarter. Investors were likely hoping for more, and shares traded down 1.3% to $275.93 immediately following the results.

Updated: December 4, 2025 at 10:59 PM EST

Before deciding whether to buy ADP or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

There is a lot to like about ADP. For starters, its revenue growth was solid over the last five years. On top of that, its scale makes it a trusted partner with negotiating leverage, and its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits.

ADP’s P/E ratio based on the next 12 months is 23.3x. Looking across the spectrum of business services companies today, ADP’s fundamentals shine bright. We like the stock at this price.

Wall Street analysts have a consensus one-year price target of $293.23 on the company (compared to the current share price of $259.16), implying they see 13.1% upside in buying ADP in the short term.