Stocks For An Economic Recovery – Information Technology
Posted on: May 31, 2009 - Email Article - Printable Version
Automatic Data Processing, Inc. [ADP: 44.24, +0.43 (+0.98%)] is the premier HR business process outsourcing (BPO) agent responsible for thousands of payroll transactions world wide. ADP is also active in providing financial information systems to car, motorcycle, marine, and recreational vehicle dealers located across all major continents. The company offers great solutions for businesses that are seeking to realize efficiencies by cutting costs of non-revenue generating units. Heavily tied to the employment rate, ADP obviously makes more fees as it disburses more payroll checks and sells more of its information systems as durable good orders pick up.
ADP is very dependent on a healthy economy, but it has managed to weather the downturn extremely well, as businesses seek operational efficiencies during the current capital crunch. The need for lean operations only helps ADP since its HR outsourcing functions includes more than just payroll, but the crucial human capital systems that every company uses to train, evaluate, and award it’s talent. This outsourcing can significantly cut costs, directly affecting the bottom-line of ADP’s customers. It is not wise to be bullish on ADP until later this year as management recently cut guidance during the first week of April. Although ADP should meet guidance, it will most likely trade sideways if not down for the majority of 2009. A Q4 entry is best, as most believe the economy will rebound mid 2010. This means the stock market should find itself in the midst of a bull market in early 2010, so remember to jump ship before the New Year. Analysts believe that macro conditions have caused ADP to suffer, so a healthy economy will lead to a healthier ADP. So, what is going to happen when the economy turns?
Simply put, ADP is going to see a renewed interest in its niche outsourcing systems and services and also a surge in payroll processing. It is simple to understand that a healthier economy leads to a lower unemployment rate, causing more payroll contracts leading to a surge in durable goods. Once the car market rebounds, ADP’s dealership services will also see its share of the pie expanding. Also, any thought that business will stop outsourcing HR functions is also flawed. The benefits are extremely high, causing companies to further digitize and outsource such operations for a “leaner” enterprise. ADP is also expanding into the BRIC nations as it just acquired a majority stake in ChinaLink to benefit from the increasing need for HR expertise in China. It is no news that China’s stimulus package is top notch and many jobs will be created through it. ADP’s confidence in this market is excellent, and should aid it in getting through worsening economic times here at home.
This strategic acquisition makes ADP one of the best-managed companies, and also one of the only AAA companies left in the world. Managerial transparencies will really aide us as investors, helping us time our entry into this position. The latest guidance was poor and did affect the stock poorly, but the commitment to transparency is really one of the best things shareholders can find. A truly rebound reliant play, ADP is a star in the IT sector. I believe that once signs of an economic rebound are observed, you should consider dollar cost averaging into this holding. Expect a bottom in margins and earnings later this year as 2010 brings hopes of an economic relief.
The rest of this free research report “Stocks For An Economic Recovery” which includes commentary on all sectors is available for download at the following link.
- Santosh Sankar
Disclosure: The Fund the author manages is long ADP.
The Following Stocks Were Mentioned In This Article: ADP
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