JANNA SAMPSON
PORTFOLIO MANAGER
OAKBROOK INVESTMENTS

COMPANY: Automatic Data Processing
TICKER: ADP (NYSE)
PRICE: $46.19 (as of 4 p.m. yesterday)
52-WEEK RANGE: $40.37-$48.11
MARKET CAPITALIZATION: $26.77 billion

Janna Sampson is a portfolio manager with Illinois-based Oakbrook Investments. Automatic Data Processing provides electronic payroll, transaction processing, and investor communication services to companies worldwide. Ms. Sampson spoke to David Dalley of The New York Sun and explained why she expects the stock to grow by 20% in the next 12 months.

What does ADP do?

They are the world’s largest payroll processor. That’s their main line of business, but they also do transaction processing for securities transactions and investor communications mailings. In fact they process almost all investor communication information in the U.S. – if you vote your proxy then it’s probably processed by them. They do all the big guys.

How does it work?

With the payroll processing, you basically submit your salaries or hours to them and depending on what you want, they will do everything up to processing all your tax payments, or they’ll simply cut your checks if that’s all you want. For smaller companies, they tend to do it all. You send in your numbers and they cut the checks, debit the money, take care of all the tax payments, and do the 401(k). And because there’s a premium on accuracy (particularly when you’re dealing with the IRS) the company really provides peace of mind and the assurance that someone else has done the calculations, and if it’s not on time, or something’s wrong, it’s not your fault.

Why is the stock a good buy?

It’s basically tracked the S&P over the last year, it’s fairly reasonably priced, and it’s trading at a forwardlooking multiple of about 23. We’re in an environment right now where payrolls are growing pretty decently and that’s increasing their earnings.

Another way they make money is by earning interest on temporary funds. Often what happens is they debit the payroll money from your account and cut the checks on their account, and in the process they earn interest on the float. That’s particularly attractive in a rising short-term interest rate market like we have now. They have about $60 billion invested daily, all short. So in an environment where we are up at 4.5% interest rates, they’re earning substantially more now than they were over the last couple years.

They’re also benefiting from strong payroll growth, but they’re trading at about the kind of P/E they were at several years ago when the employment market in the U.S. was much weaker.

The one-year return for this stock was below the market. People have been worried over the last 18 months that employment and payroll weren’t going to grow, but they’ve both continued to be very healthy. And all the projections for hiring, employment, etc., look very good going forward.

In terms of their other businesses, there’s been an uptick in takeovers right now, and since they handle a huge amount of investor communications on which they earn fees, they’re benefiting from the increase in activity.That’s projected to continue into the next year.

Where do you see the stock price heading?

They released a good earnings report recently, which is probably what generated some of the enthusiasm we’ve seen this month. For February the stock was up 5.2%. It’s an upside surprise and people are starting to take notice.There was significant fear in the market that the interest rate hikes were going to slow down the economy enough that we would see employment slow down, and that that would offset the positive effect of the rate increases on earnings. Well we haven’t seen that and people are beginning to see that we’re nearing the end of this phase of tightening and that the economy is still doing fine.

The stock is up around $46.20 right now. We’re looking for it to be about 20% higher, at around $54 in about 12 months.