Shares of ADP ADP have gained 16.4% over the past three months, beating the industry’s 6.8% rally and the Zacks S&P 500 Composite's 14.7% rise.
3-Month Share Price Performance
The Zacks Consensus Estimate for 2026 revenue is $21.9 billion, suggesting 6.6% year-over-year growth. For 2027, the same is expected to increase 5.9%. For EPS, the consensus estimate is set at $11.08, indicating a 10.7% rally from that reported in the preceding year. The same is expected to move up 10% year over year in 2027.
Factors That Augur Well for ADP’s Success
AI Unlocks Operational Prowess: ADP Assist Payroll, which is an AI-powered HR and payroll assistant, saved 30 minutes per payroll. Smart Actions search led to a reduction in clicks and time expenditure by nearly 80% for common HR actions. The company witnessed a dip in cost to serve and an improvement in clients’ experience from productivity gains facilitated by AI incorporated in service tools and product innovation.
For instance, ADP’s RUN platform and AI-powered tools deployed to benefit more than 900,000 small business clients resulted in an 8% year-over-year decline in client contracts during the third quarter of fiscal 2026, the busiest quarter. First-time deployment of AI in India allowed ADP to reduce call volumes and labor by 35%.
Pricing Power Drives Margins: In the third quarter of fiscal 2026, ADP stated an expected 70-80 basis point (bps) expansion in its adjusted EBIT margin for fiscal 2026. It is bolstered by a 130-bps expansion in Employer Services (ES) margins reported in the third quarter of fiscal 2026.
With margins gaining momentum, ADP’s earnings moved up to $3.38 per share from the year-ago quarter’s $3.06. Capitalizing on this enhancement, management expects adjusted diluted EPS growth to be 10-11% for fiscal 2026. These metrics paint an attractive profile highlighting its ability to scale profitability.
Ideal for Income-Seeking Investors: ADP pays out dividends regularly, with $1.9 billion, $2.2 billion and $2.4 billion paid out to its shareholders in fiscal 2023, 2024 and 2025, respectively. Furthermore, the company raised its quarterly payout to $1.7 per share at the end of 2025 and kept it consistent for the first, second and third quarters of fiscal 2026.
This is a shareholder-friendly move, capitalizing on steady income growth and cash flow over the past years. Betting on this bullish trajectory, we expect the company to pay out stable dividends, which is a green flag for dividend-seeking investors.
Solid Balance Sheet Drives Liquidity: ADP ended the third quarter of fiscal 2026 with a cash chest of $3.2 billion against no current debt. A current ratio of 1.04 solidifies ADP’s ability to pay off short-term obligations, signaling a strong liquidity position. While the company holds nearly $4 billion in long-term debt, a 13.5X times interest earned multiple flaunts robust debt coverage ability, fueling investor optimism.
Risks Faced by ADP
PEO Segment’s Margin Setback: The PEO segment gained 6.5% year over year in revenues during the third quarter of fiscal 2026, representing 32% of the top line. Despite this improvement, segmental margins declined by 120 basis points from the year-ago quarter. While the primary factor affecting margins was increasing selling expenses, the drag was furthered by higher state unemployment insurance costs and lower positive reserve releases in workers’ compensation reserves for indemnity.
Softening Volume: Low baseline volume growth is demonstrated by the rally in ES pays per control stalling at 1%. This weak expansion is affected by softening of PEO pays per control, which strips away high-margin revenue streams, affecting PEO margins. It hints at a structural shift in ADP’s growth story, which unveils that the expansion is no longer accelerated by additions of organic headcount or raw workforce volume.
High Competition Faced Across Segments: ADP operates in a fiercely competitive environment in each of its product lines. Both its Employer Services and PEO Services segments compete with other independent business outsourcing companies in most of their operating regions. ADP has observed negative impacts on its retention rate due to the rising competition and migration from the legacy business.
ADP’s Zacks Rank & Stocks to Consider
The company has a Zacks Rank #3 (Hold) at present.
Some better-ranked stocks from the broader Zacks Computer and Technology sector are BILL Holdings BILL and Datadog DDOG, currently flaunting a Zacks Rank #1 (Strong Buy) and Zacks Rank #2 (Buy), respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.
BILL Holdings has a long-term earnings growth expectation of 30%. BILL delivered a trailing four-quarter earnings surprise of 21.7%, on average.
Datadog has a long-term earnings growth expectation of 15.3%. DDOG delivered a trailing four-quarter earnings surprise of 15.4%, on average.
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This article originally published on Zacks Investment Research (zacks.com).
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