Monday, March 30, 2009

OCD Stock Pick #1: ADP

This is the first in a series of stock picks for the stock pickers suffering from OCD who MUST go long in the world's most dangerous bear market...

ADP is a payroll processor with long standing relationships and an excellent business track record. With the downgrade of GM, ADP is one of the only four industrial companies retaining AAA credit rating. The company generates $1.2B in annual profit and $1.5B in free cash flow with a $18B market cap ($36/share). Due to the high cashflow, the 3.6% yield is safe assuming no cataclysmic economic events occur.

ADP is a company that can be called “an original outsource outfit”. Companies often hand over their payroll responsibilities to ADP to make sure their employees are paid appropriately and on time. Therefore growth of the payroll business is directly correlated to the amount of people employed across industries. Considering the downside risks to the economy, a healthy margin of safety is necessary to avoid having an autistic tantrum if market turmoil makes this sleepy stock more volatile than what you are looking for.

The author recommends that those suffering from OCD to buy the stock at 12x a deep recession level free cash flow of $1.1B/year, producing a 13.2B market capitalization or $26/share.


Lockstep said...

Great pick. This stock is still the only remaining AAA stock on the NYSE. The purchase price was a little to defensive in hind sight. But considering that was the first full government bailout of the complete financial sector that this investor has ever experienced, this deserves a pass.


Great stock interesting that so few stock are AAA.