Look for ADP to rise with payrolls

Posted Nov 20th 2009 3:40PM by Joseph Lazzaro
Filed under: Stocks to Buy

If, in fact, jobless claims have peaked, that's good news for payroll services specialist Automatic Data Processing (ADP), and that's one reason I'm reiterating my buy rating for the company's shares, first recommended on June 22, 2009 at a price of $36.84. If you bought ADP in June, you're up about 20%.

Despite the worst recession in more than 25 years – one that has devastated payrolls – ADP has held its own, with its stock price this year recovering about one-half its loss following the drop from its peak in 2007.

Longer-term, the payroll out-sourcing market has ample room for market share gains and the mining of new clients, especially small/medium sized businesses. International business opportunities and a strong balance sheet further supports the Buy rating. The First Call FY2010/FY2011 EPS estimates for ADP are $2.39 to $2.53.

Technically, ADP' stock's recently tested 2-year resistance at $44, and a recent pull-back represent an satisfactory entry point. A triple-bottom at/near $33 provides better-than-decent support. Of course, the stock will likely encounter psychological resistance at $50, but this should prove to be minor: ADP should trade above $60 in 2010.

Stock Analysis: Automatic Data Processing is a moderate-risk stock. If you've already purchased the company's shares, hold them. If not, consider buying a 25% position in ADP now; then buy another 25% in one month, if U.S. and global economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your ADP position before December 2009. Sell/Stop Loss if you were to buy shares in this company: $22.

Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

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