JANNA SAMPSON
DIRECTOR OF PORTFOLIO MANAGEMENT
OAKBROOK INVESTMENTS

COMPANY: Automatic Data Processing
TICKER: ADP ( NYSE)
PRICE: $43.86 (as of 4 p.m. yesterday)
52-WEEK RANGE: $40.37-$48.11
MARKET CAPITALIZATION: $25.4 billion

Ms. Sampson oversees Oakbrook’s quality growth strategy and enhanced index funds. She spoke with Katharine Herrup of The New York Sun about why ADP will have solid growth, at least for the next 12 months.

What does ADP do?

They are the leading payroll processor in the world – that’s the bulk of their business, which is about 80%. They have a small brokerage processing area where they settle brokerage security trades. They do a lot of the United States companies’ proxy [annual reports] mailings. They’re also the primary processor of proxy vote.

Where is the company located?

New Jersey.

Why do you like the stock?

It’s trading at close to a three-year low in price-to-earnings ratio, which is how you determine the value of a stock. ADP reported earnings the last day in April – revenues were up 10% in their payroll business and earnings were up 12% overall. Earnings were also up 13% from continuing operations.

What is Oakbrook’s share of ADP stock?

We control 563,000 shares of ADP. In our quality growth strategy portfolio, ADP is just under 7% of the portfolio. For the quality growth portfolios and the mutual fund we sub-advise, ADP stock is one of the top five holdings.

What do you think the stock is worth?

The stock price is lower than it should be. The company sold off its high while it continued to turn in good earnings and revenue growth.

We believe the earnings were a penny a share better than analysts were expecting, but there was some confusion as to whether the forecast was for continuing earnings or overall earnings so the market reacted like it was an earnings disappointment when in fact it was an upside surprise.

How do you expect the company to perform going forward?

We’re looking for earnings growth of 26% or better – that’s the high end of ADP’s forecast. We’re looking for the stock to be $52 to $53 per share over the next 12 months.

What’s driving growth forward?

Part of it is the interest income, part of it is increasing payroll – employment is up in the United States. Economic growth looks like it’s going to hold at a good rate, which should help to keep the employment rate up. Good employment, a boost from the interest income on the funds, and employment in Europe looks like its stabilizing where it had been falling so Europe ap pears to be stabilizing so it won’t be a drag to the good U.S. numbers.

What is the stock’s forecast?

We think there is a real opportunity to buy this stock at a very reasonable price and that the market took the price down between 4% and 5% over the last week. Even though the company reiterated a forecast for 24% to 26% growth in earnings, and revenue growth at 10%, we think the company might actually do better than those forecasts because the company earns interest on the cash that it holds to make payroll and tax payments for its payroll clients and they are using a 4% interest rate in their forecast. And, of course, three-month interest rates today are about 4.7% verse ADP who is expecting a 4% return on the funds they have invested for their clients. So with rates above that level and rates that are predicted to go up, we expect that ADP will earn more in interest income than their forecast currently has in it.