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Last month, I highlighted Automatic Data Processing (ADP):

ADP is starting to catch my eye as a good contrarian stock. (The first step, however, is to ignore their notoriously inaccurate monthly employment reports.)

The stock is down to $44 from $50 in early June. I’m not claiming any great insight on its business, but it’s simply a good stock at a good price. In the last three years, earnings are up 56%. Gross margins are around 50% and the company has a solid balance sheet.

The company also raised guidance for FY 08. ADP is now looking for 12% sales growth and profit growth of 18% to 21%. I like those numbers.

The company reported earnings today of 45 cents a share, two cents more than expectations. Last year, ADP earned 39 cents a share. Revenues were up 13.5%% to $1.99 billion.

The company also nudged up its guidance for next year. ADP sees earnings coming in at the high end of its earlier forecast of $2.12 to $2.18 a share. Sales growth is now projected at 12%-13% instead of just 12%.

The stock is up about 3% this morning to $48.64.

As with many contrarian picks, ADP does face some serious problems. Scott Rothbort, my colleague at Real Money, summarized the headwinds facing ADP:

First is the slowing growth in payrolls. While employment growth remains positive, the rate of growth has declined over the last year. Second are declining interest rates. ADP makes a considerable amount of money on the float, which is due to the timing between the employer payment of payrolls to ADP and the clearing of the individual employee checks. Furthermore, with more people opting for direct debit, ADP's float base is also declining.

Posted by edelfenbein at October 30, 2007 10:28 AM