Episode Details

Automatic Data Processing, Inc. (ADP) Q4 FY2026 — FY26 revenue $21,947.4M (+7%, +6% organic cc) and adjusted diluted EPS $11.12 (+11%) — the top of the guide. Q4 revenue $5,473.8M (+7%), adjusted EPS $2.64 (+17%), GAAP $2.45. Adjusted EBIT margin +80 bps to 26.8%. FY27 guide: revenue +5–6%, margin +70–90 bps, adjusted EPS +9–11%. But interest on client funds was $1,354.8M (+14%) — 23% of adjusted EBIT — and supplies ~38% of the guided FY27 EBIT increase. Stock closed $273.37 on the print, then gave the whole pop back at $263.87. Three things the coverage missed. (1) The float: interest on client funds was $1,354.8M — 6.2% of revenue but 23% of adjusted EBIT. ADP guides it to $1,540–1,560M in FY27, a $195M increase against a guided adjusted-EBIT increase of ~$509M. That is ~38% of next year's profit growth from one line, resting on Fed Funds futures as of July 28, 2026 (blended new-purchase rate 4.4%, yield ~3.7%). (2) The correlation: client-funds balances are payroll dollars in transit. ADP guides balances +3–4% while pays per control grows 0–1%, so nearly all balance growth is wage inflation — a labour market weak enough to force faster cuts hits the yield, the balances AND the volume at once. (3) PEO: reported margin fell 110 bps to 13.1%, but on revenue excluding zero-margin pass-throughs ($2,520.8M vs $2,401.4M) it fell 39.6% to 37.1% — 245 bps, double the headline. PEO earnings FELL 2% to $936.1M, the only part of ADP that shrank. THE CALL: HOLD (3/5, A SUPERB BUSINESS, HONESTLY PRICED) — base-case value ~$273.0 vs ~$263.87 today. KEY METRICS: - FY26 revenue $21,947.4M +7% (+6% organic cc); Q4 revenue $5,473.8M +7% (+6% organic cc) - FY26 adjusted diluted EPS $11.12 +11% (top of guide); GAAP diluted EPS $10.94 +10% - Q4 adjusted diluted EPS $2.64 +17%; GAAP $2.45 +10%; Q4 adj EBIT margin +140 bps to 25.1% - FY26 adjusted EBIT $5.9B +10%; adjusted EBIT margin +80 bps to 26.8%; net earnings $4,413.5M +8% - Interest on client funds $1,354.8M +14% = 6.2% of revenue but 23% of adj EBIT, 24% of pre-tax - Avg client funds balance $40.4B +7%; avg yield +20 bps to 3.4%; Q4 balance $41.0B, yield 3.5% - FY27 float guide $1,540–1,560M = ~$195M of the ~$509M guided adj EBIT increase (~38%) - Employer Services revenue $14,831.4M +7% (+5% organic cc); segment margin +60 bps to 36.7% - ES bookings $2.2B +6%; client retention flat 92.1%; U.S. pays per control +1% (FY27 guide 0–1%) - PEO revenue $7,128.1M +7%; ex zero-margin pass-throughs $2,520.8M +5%; avg WSEs 762,000 +2% - PEO margin ex pass-throughs fell 39.6% to 37.1% (-245 bps); segment earnings $936.1M, DOWN 2% - Cash from ops $5,441.2M +10%; capex $197M + capitalised software $469M = 3.0% of revenue - Corporate net debt only $873M ($4,964M LT debt + $139M repo less $4,230M cash) — client funds excluded - Returned $4,710M: $2,626M dividends + $2,083M buybacks; shares 405.3M to 397.8M (-1.9%); ROE 72% - FY27 guide: revenue +5–6%, adj EBIT margin +70–90 bps, adj diluted EPS +9–11%, tax ~23% What to watch: Bullish: pays per control reaccelerating above 1%, and ES bookings at the top of the 4–7% guide while retention holds at 92.1% rather than sliding the guided 10–30 bps. Bearish: the client-funds yield missing the ~3.7% path (100 bps of extra easing costs ~$100M of pre-tax income in year one, and compounds), and PEO margin ex pass-throughs below 36%. We would buy in size around $235. Also on YouTube: @ChargedAlpha DISCLAIMER: For informational and educational purposes only. Not financial advice. Do your own research before any investment decision.