Should You Buy It? ADP

The company also generates about 15% of its revenue from services for truck and auto dealers, another business that is clearly under pressure. In addition, ADP's profit is hurt in a period of falling interest rates, as the company earns a sizable float on the payroll funds that it holds for customers. Still, the company claims that 90% of its revenue is recurring, led by the three-quarters of its total revenue generated by payroll services.

But with its growth prospects diminishing, is ADP really worth 16 times expected full-year earnings? While this represents the low end of the company's historical average valuation over the past decade, it's also a 40% premium to the S&P 500.

Investors can take heart in the fact that ADP raised its quarterly dividend back on Nov. 11 to 33 cents a share. Shareholders at the close of trading Dec. 9 will qualify for the Jan. 1 payment. The company has boosted payout for 34 consecutive years and the 3.5% yield is on par with what the average S&P 500 stock pays.

In addition, management announced a 50-million-share buyback program on Aug. 14, equal to about 10% of the overall company. And with about $1.6 billion ($3.10 a share) of net cash on the balance sheet, ADP has plenty of cash to return to investors.

At the end of the day, however, readers should avoid shares of ADP at current levels. While the company has a solid balance sheet, the stock trades at a hefty premium to the market and management faces significant headwinds to growth in fiscal 2009.

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Know what you own: ADP operates in the staffing and outsourcing industry, as well as business software and services; some other stocks in these fields include Administaff (ASF - commentary - Cramer's Take), Gevity HR (GVHR - commentary - Cramer's Take), Wipro (WIT - commentary - Cramer's Take) and Fiserv (FISV - commentary - Cramer's Take).

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David Peltier is a research associate at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback; click here to send him an email.

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