Automatic Data Processing, Inc. (ADP): A Bull Case Theory

Core Thesis - The bullish thesis on Automatic Data Processing, Inc. (ADP) emphasizes its position as a high-quality, mission-critical services company with a strong business model characterized by recurring revenue and deep customer entrenchment [2][7] Business Model - ADP's core earnings power is derived from Employer Services, where clients pay recurring fees for payroll processing, tax filing, and essential HR functions [2] - The company boasts a 92.1% revenue retention rate, indicating that customers rarely leave once onboarded [3] - ADP earns interest income on approximately $31 billion of held client funds, generating about $1.2 billion of high-margin income in fiscal 2025 [3] Financial Performance - ADP efficiently converts earnings to cash, producing nearly $4.9 billion in operating cash flow on $4.1 billion of net income with minimal capital spending [5] - The company's margins may fluctuate due to investments in sales and product development, but these are seen as reinvestments to maintain a resilient franchise rather than signs of structural weakness [6] Market Position - ADP operates a co-employment model through its PEO segment, which can inflate reported revenue but still reflects meaningful economic revenue and margins [4] - The business is predominantly U.S.-based, with international payroll adding complexity that strengthens customer reliance and creates long-term margin expansion opportunities [4] - The company's competitive advantage is supported by high switching costs, regulatory complexity, and a broad distribution network that consistently generates new client wins [5]