ADP’s business remains robust, but the recent decline in stock price doesn’t necessarily make shares appealing.
Investors often label Automatic Data Processing (ADP 1.69%) as a “boring” company. However, its market valuation rarely reflects this perception. As a provider of payroll and human resources software, ADP typically trades at a premium due to its business’s sticky nature and the recurring revenue it generates from one of corporate America’s vital processes: payroll management.
But is the stock losing its appeal among investors? Currently, shares are about 23% off their 52-week high.
Yet, another perspective exists: Is the market finally offering a reasonable entry point for a solid long-term investment?
What Changed, and What Did Not
Examining ADP’s recent performance reveals consistent growth. In the first quarter of fiscal 2026 (ending Sept. 30, 2025), the company reported a 7% increase in revenue year over year, reaching $5.2 billion. Earnings per share rose by 6% to $2.49, while non-GAAP earnings per share increased by 7% year on year.
Despite steady compounding, a concern looms: ADP’s core volume indicator, or “pays per control”, is starting to cool off. This metric signifies how many employees are on ADP clients’ payrolls in the U.S. For the first quarter of fiscal 2026, this figure was almost flat compared to the previous year, down from the 1% growth seen in the last two quarters of fiscal 2025. If this trend stagnates or declines, it could lead investors to question the sustainability of the company’s growth and its stock valuation.
New Growth Avenues
The critical aspect of ADP’s long-term strategy is not merely processing more payroll checks but expanding into a comprehensive human capital management (HCM) platform that integrates payroll, HR, benefits, and compliance into a singular solution. Thus, the company can thrive even if its pays per control remains unchanged. Initiatives such as ADP Workforce Now NextGen and ADP Lyric HCM are poised to enhance service offerings to existing clients while attracting new business.
Thus, even amid a stagnant pays-per-control environment, ADP possesses growth avenues. Notably, its fiscal first-quarter results demonstrated that growth persisted despite flat U.S. pays per control.
Analyzing Stock Valuation
Despite the recent pullback in stock price, shares maintain a considerable premium, particularly since ADP’s earnings per share growth is trending in the single digits. Currently, ADP trades at a price-to-earnings ratio of 25 and a forward price-to-earnings ratio of 23. While these figures aren’t excessive for a growing software-as-a-service firm, they may seem high given the stagnation in pays-per-control trends. The company’s increasing reliance on enhancing product offerings could place its earnings-per-share growth under pressure, potentially making investors less inclined to pay a premium for the stock.
As such, I plan to remain on the sidelines for now, even with the lower stock price. Should the shares decline further to achieve a price-to-earnings ratio closer to 20, I may reconsider my position.
