The world's largest provider of outsourced payroll-processing services, Automatic Data Processing
In some respects, the fourth quarter mirrored the year as a whole -- revenues were up 9%, but net income was slightly down. However, there were signs of strength: New business sales jumped 19% for the quarter, brokerage services revenues grew 5%, dealer-service sales rose 13%, and the average client payroll grew 1.5% larger -- all indicative of a strengthening economy and a workforce that has swelled by an average 211,000 workers per month over the past six months.
When Warren Buffett trimmed his position in Automatic Data Processing -- as well as several other companies, including Gannett
Back-to-back down years bear out the validity of his assessment, but two of the underlying causes, an anemic job market and record-low interest rates, have shown improvement. Though ADP has branched into other services that target the financial, auto dealer, and insurance industries, the employer-services division (with 60% of revenues) still carries most of the weight. A firming job market will support this core business segment, which also markets tax filing, 401(k) administration, pre-employment screening, and workers compensation insurance.
Rising interest rates will also help boost future revenues. The firm temporarily holds money that is collected from 460,000 employer-services clients before it is redirected to the appropriate location. In the interim, substantial interest is earned, and an increase in short-term rates will only enhance that income.
With a broad-based economic recovery and only a handful of top-tier rivals such as Paychex
For a more in-depth look at both ADP and Paychex, read Selena Maranjian's Paychecks From Paychecks.
Fool contributor Nathan Slaughter owns none of the companies mentioned.