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Wall Street, California | STOCK EXCHANGE

ADP's All but Automatic Growth, and What's Driving Iomega

October 20, 1998|JAMES PELTZ and MICHAEL HILTZIK

Stock Exchange gives readers a chance to listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks and other investments.

Automatic Data Processing (AUD)

Chase Manhattan Monday: $77.50

Jim: If I could buy only one stock, Mike, Automatic Data Processing would be on my short list. Year in, year out, it's a great pick.

Mike: Automatic Data Processing is the Cal Ripken Jr. of Wall Street, all right.

Jim: Folks sometimes misidentify the company as Automated Data Processing and assume its ticker symbol is ADP when it's actually AUD. But one thing is crystal clear: This is a premier operation.

Mike: No question, its record is pretty hard to beat.

Jim: It's startling, actually. ADP has reported double-digit gains in revenue and earnings per share for 149 straight quarters! That's 37 years, going back to 1961 when ADP went public.

Mike: This is the classic Graham and Dodd stock.

Jim: In what way?

Mike: Benjamin Graham and David Dodd wrote a famous book, "Security Analysis," that explains how to find value stocks, a book that's touted by the likes of billionaire stock picker Warren Buffett. ADP is such a stock. It returns value. It's something you can sink your teeth into. It's the opposite of a speculative stock.

Jim: First things first. ADP, as its name implies, is a leading provider of computer services for other companies of all shapes and sizes. But small businesses, especially car dealers, use it a lot.

Mike: ADP handles payroll services, benefits computations, credit processing, that sort of thing. Many of our readers probably get their paychecks from ADP, printed on paper that has the "ADP" logo in the background.

Jim: Despite what the company's string of earnings gains make you think, it by no means dominates its industry. No one does. In other words, it still has lots of room to grow.

Mike: How else to explain how its earnings string could continue so long?

Jim: But ADP said a while back that it won't be held hostage to keeping that string alive. That raised eyebrows on Wall Street, to say the least.

Mike: Sort of like Ripken saying a year ago that he might sit out a game or two in 1998--as he finally did. So the question is: Are these two streaks coming to an end at around the same time?

Jim: I don't think so, but this is the type of uncertainty that's long been the polar opposite of what investors have gotten with ADP.

Mike: Maybe ADP is just being realistic. It's always hard to maintain double-digit earnings growth when you've been doing it for 37 years, compared with, say, a company just starting out and working from a small base. But the market is probably safe in making the assumption that ADP will still deliver excellent gains.

Jim: Agreed. Whether it's single- or double-digit growth, I expect ADP to keep generating very strong results.

Mike: And it doesn't trade at a price-to-earnings multiple that's anywhere near as high as some companies that get Wall Street all excited by posting two or three quarters of double-digit gains. ADP currently sells for about 34 times its fiscal '99 earnings per share. Not cheap, but you're paying for its consistency.

Jim: Now, there is one risk with ADP that makes me a little nervous: About 20% of the company's revenue comes from its back-office automation work for the volatile brokerage industry.

Mike: In another words, if Merrill Lynch & Co. sneezes, ADP might catch cold.

Jim: You got it. And there's been more sneezing and sniffling on Wall Street lately, given the market's slide, than at a performance of Wagner. But I'm not overly worried about it, because ADP isn't dependent on that business.

Mike: Not only that, if Wall Street brokerages get a bad case of the sniffles, they just might outsource more of their back-office business to people like ADP, to save money.

Jim: Yep. That's ADP's whole bag--that they can do many of these automation chores for less money than its customers can do them in-house.

Mike: All of which explains why ADP's stock, which currently trades in the high $70s, has generally weathered the stock market's slump this year. It took a hit last month--on no news that I could find--but it's climbing again and is up a whopping 55% for the past 12 months.

Jim: Think about it: ADP has chalked up its remarkable earnings string through recessions, wars, merger manias, stock market crashes, you name it.

Mike: Know what else I like about ADP? It's the opposite of those "story" or "concept" stocks that somehow manage to draw investors' cash on a wing and a prayer, then naturally disappoint. There is no story here except solid, consistent earnings. No glitz, just performance.

Iomega (IOM)

Iomega Monday: $4.31

Jim: Speaking of disappointment, some readers asked us to look at Iomega, which has become yet another example of what happens when a stock gets hyped way out of proportion to its value. In other words, Mike, it's been a forerunner of today's Internet stocks.

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