A Stock for Dad: ADP

This is part of The Motley Fool's annual " Stocks for Dad " special (Father's Day is June 15). Check back Tuesday, June 10 for a player in the online travel industry -- just in time for Dad to Stock Up for Summer.

Automatic Data Processing (NYSE: ADP)
Trading at $35.12 as of June 6, 2003

Dad, you're a giant among fathers, and you deserve nothing less than a giant among companies. So consider adding a few shares of Automatic Data Processing(NYSE: ADP) to your portfolio. Here's a brief introduction to it. First off, in the company's own words:

We're the Business Behind Business. Providing paychecks for approximately 30 million workers worldwide, processing securities transactions for clients on 5 continents, delivering computing solutions to more than 16,000 auto/truck dealers, and serving more than 20,000 clients in the property and casualty insurance industry.

Here are some additional impressive numbers:

• The company rakes in more than $7 billion per year in revenues.
• It generates more than $1 billion in earnings and free cash flow annually.
• It serves some 450,000 client companies. (Yes, nearly half a million!)
• Its return on equity is around 21%.
• Its price-to-earnings (P/E) ratio, at roughly 20, might not seem cheap, but it's low to average for the company. ADP's P/E hovered between roughly 20 and 50 over the past five years. Over the previous few years, it was in the low 20s.
• Its gross margin is near 60% and its net profit margin is around 15%.

How exactly does this company generate all that moolah? Well, it's a major player in many different arenas -- offering mainly its automation services to companies looking to spend less on various functions by outsourcing. Here's a list of its main activities:

• Employer services: This is what ADP is known for, handling many companies' payrolls, tax, and compliance management, 401(k)/retirement plans, benefits administration, expense management, employee screening and hiring, and more.
• Claims management solutions: ADP helps property/casualty insurers to streamline workflow, increase estimating accuracy, and speed claims processing. (Among many other things, it processes auto damage claims -- in no fewer than 20 countries, to boot.)
• Auto/truck dealer and manufacturer systems: ADP helps auto retailers improve efficiency, client relationships, and profitability. (Its systems can estimate the costs of various auto repairs and keep track of parts availability.)
• Securities processing and investor communications: ADP helps financial services companies process trades, manage information, and distribute shareholder communications. (You know those annual reports you get from companies? They're often distributed by ADP, through an arrangement with your brokerage. ADP also recently inked a deal to convert E*Trade's(NYSE: ET) back-end office and records to ADP systems for the next decade.)

Learn more at the company's website.

If you're sufficiently wowed now, good. But don't think that all is rosy. For starters, the company is facing increased competition, such as from Paychex(Nasdaq: PAYX). Also, remember that ADP generates a chunk of its income from brokerage-related activities. (For fiscal 2002, a revenue pie chart would show the following units contributing the following portions: Employer services, 60%; Brokerage services, 25%; Dealer services, 10%: and Claims services, 5%.) Remember that, despite showing signs of life over the past two months, our friend the stock market has been sulking in a corner on a time-out for several years, as punishment for its irrational exuberance. The brokerage-related part of ADP's business has been hurting, and will likely continue to put downward pressure on earnings. But sound Foolish thinking will help you realize that this is inevitably a short-term, temporary problem.

Better still, this slump has presented a possible buying opportunity, with the company's stock down considerably. Only a few years ago, it was trading in the $60s. Today, it's hovering in the mid-$30s. Some further research on your part might reveal this as one of those perfect investing opportunities -- where a rock-solid, long-term performer is available at a reasonable price due to a short-term slump. Sure it has some challenges to overcome, but this is a grand old company, with a very strong track record. It certainly has a good chance of performing well for many years to come. Kind of like you!

Happy Father's Day, Dad!

It's Stock Up for Summer month on Fool.com. Make a splash with your investing cash!

Selena Maranjian has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens . For more about her, view her bio and her profile. The Motley Fool is Fools writing for Fools. 

A Stock for Dad represents the opinion of one Fool and should in no way be taken as the opinion of either The Motley Fool, Inc. or the company in question, or as representative of anyone or anything other than that specific Fool's thoughts.