ADP Analyst Meeting: A Review

By Eric Fox | March 31, 2009 AAA

ADP (Nasdaq:ADP) used its annual analyst meeting to lower its 2009 forecast for earnings and revenues, outline its strategy in all its business segments and reassure investors that its investment portfolio was safely invested in high-quality securities.

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Safe Portfolio

ADP invests client funds that are held prior to paying employees and making required payments to the government. The company does not own any subprime or ALT-A securities in this portfolio, and stresses safety of principal, diversification and liquidity when investing. The size of the portfolio is $14.9 billion with $10.1 billion invested in AAA areas, and virtually the entire portfolio in paper rated A or better. The company does have approximately $1.4 billion invested in both Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) bonds, and is banking on an implied guarantee on these holdings. (Learn more in the Bond Basics Tutorial.)

Employer Services
The employer services segment of the company provides payroll processing, tax and benefit administration products and other services to 563,000 clients in the U.S. and abroad. Approximately 70% of its clients are in the small business category with less than 50 employees. Despite the large number of clients in the small business area, ADP only has 7% of the market. ADP expects 4% revenue growth here in 2009, according to its March 25, 2009 annual financial analyst conference.

Professional Employer Organization Services (PEO)
ADP's PEO segment provides businesses with employment administration outsourcing services including payroll, payroll tax filing, human resource guidance, 401(k) plan and benefits administration. This is the company's fastest growing division, with a 14% growth rate in revenue in the fourth quarter of 2008.

Dealer Services
The company's dealer services segment offers technology services to 27,000 automotive and heavy truck retailers in more than 90 countries. Revenue here was $1.4 billion in 2008. Despite the fall in auto sales, and the potential for large cuts in dealerships, ADP is convinced it will continue to be profitable in this area. It plans to focus on cost-cutting and continuing its long-term strategy to grow its business, which is independent of the business cycle.

Reduced Guidance
ADP lowered its outlook and said that revenue growth in 2009 would be in a range of 1-2%, compared to the guidance of 2-3% it gave at the beginning of February. Earnings from continuing operations would grow at the low end of its 10-14% range. Other companies have lowered guidance recently as the recession continues. Xerox (NYSE:XRX) said that first-quarter earnings per share would come in at 3-5 cents, down from a previous range of 16-20 cents. Management said that revenue in January and February was down 18%. (Take a page from the "Tortoise and the Hare" fable by investing in constant growth stocks, see Steady Growth Stocks Win The Race.)

In the telecom equipment area, Sony Ericsson Mobile Communications said that its first quarter results would be negatively impacted by the weakness in consumer demand and "de-stocking in the retail and distribution channels." This company is a joint venture that was formed in 2001 between Sony (NYSE:SNE), the giant consumer electronics company, and LM Ericsson (Nasdaq:ERIC), the Swedish handset maker. The joint venture sold 97 million phones in 2008.

ADP sought to calm market fears at its analyst meeting that its operations would suffer further damage due to the recession and its exposure to the automotive industry. The company also outlined a plausible scenario under which one of the few remaining AAA-rated companies would thrive once the economy recovered.

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