Sandra Ward, Barron’s analyst/reporter recommended ADP in this coming week’s Barron’s. The company figures there is a $70 billion market for outsorced payroll services, which it plans to dominate. Paychex goes after smaller businesses, but ADP owns mid to large company market. The company has delivered double-digit revenue and earnings growth for the past two years and is expected to do so again this fiscal year. Its dividend yields better than 2.5% and it’s been buying back shares using the formidable flow of cash it generates each year. Margins are expanding. Ninety percent of its revenues are recurring (this is HUGE and very enviable by any business), and it boasts extremely high customer-retention rates. Also, it’s shares are trading at a lower P/E than its historical norm of 24. So, it seems as though this is a stock worth considering in this very volatile market.

In addition:

a. The company is currently out of favor with investors. There are concerns that the weak economy will hinder growth as layoffs mount and companies become hesitant to spend money on outsourcing. There are worries, too, about the effect of lower interest rates on its investment portfolio, essentially the float from the funds that companies pay in advance to ADP before the employee checks are cut (this is a big part of how these companies make money).

b. Through its car-dealer operation, which provides an array of back-office services for dealerships, ADP is exposed to the struggling U.S. auto market.

c. The company has sold or spun off sluggish business segments, including an insurance-claims management business and a securities transaction processor. So, the company is focused on its core business of providing employee services to companies, which accounts for about 90% of its revenue.

d. Mid-size companies, roughly 45%-50% outsource the function, so there is a huge market to tap.

e. It is moving aggressively to offer high-margin “beyond payroll” products and services such as 401(k) and benefit administration. And it’s expanding its overseas presence in employee services.

f. other weaknesses include sales moderating and float interest being flat last quarter.

CONCLUSION:

Investors are missing a nice opportunity to pick up shares at a discount to ADP’s normally fat premium. According to Ward, buying into ADP at these levels seems automatic. And, a bet on the stock at these depressed levels will pay off once the skeptics realize what they are missing. ADP is tending well to both its main business and higher-margin operations like 401(k) administration. Its depressed shares could jump more than 40%.

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