ADP

With the Federal Reserve now lining up next to Janet Yellen, a lady au fait with the policies of monetary largesse, there should be no surprise to see the stock market being stretched to all-time highs – albeit where headline valuations are only deemed palatable when compared to bond prices long manipulated by the long, cold fingers of QE. For bottom-up stock picking the current set-up and media crackle on bubble-like conditions then is a near perfect piste. Stock fundamentals now matter. And where those fundamentals are aligned with the Federal Reserve’s explicit goal of full employment, all the better. Once such stock is ADP, the market leader in human capital management, a fluffy term used to describe the provision of outsourced HR solutions for companies both big and small. Think payrolls. Think, also, add on services like benefits administration, insurance and retirement services and systems that clock and dock attendance. For CEOs who no longer want to deal with everything HR, they can do it for you. For a fee. And if the Federal Reserve are all in on getting back to full employment, given the current starting point, this is some tailwind for ADP. For analysts, the financials are described as ‘clean’; effusive words, too, for a pristine, debt-free balance sheet. Those same analysts also whisper that this is a company that is on a transition. For a long time viewed by the market as a dusty payroll processing provider, it is on a journey to a more tech-enabled human capital solutions provider. Based in the cloud. And the marketplace is huge, a $125bn industry growing at a decent mid-single digit clip. For ADP, it’s there for the taking. The sticky employment environment has rinsed the valuation of a multiple that has typically traded on a massive premium to the broader market, courtesy of delivering a consistent 40%+ ROE. Now the risk is that the Fed are not successful and full employment remains a pipe dream given the permanent economic scaring from the pandemic, but the risk/reward for the share price of ADP if they are successful, is a skew that will have stock pickers tapping their toes.