NEW YORK (TheStreet) -- After a better than expected jobs report highlighted by a drop in the unemployment rate to below 8%, Goldman Sachs (GS) says one stock stands out as millions of new jobs are added and employment recovers to pre-crisis levels.
That stock would be payroll processing giant ADP (ADP), who's pay stub figures are used to calculate the ADP National Employment report, an economic indicator that often foreshadows official U.S. Department of Labor jobs reports. ADP, Goldman argues, is poised to see its earnings per share grow by 50% to $3.49 as employment returns to a pre-crisis peak hit in January 2008, and is in a far better position than competitor Paychex (PAYX) to profit from the prospect of a sharply falling unemployment rate.
"We estimate that, when employment eventually reaches its previous January 2008 peak, ADP will be generating 50% higher EPS whereas PAYX's earnings will be up less than 10%," writes Goldman Sachs analyst Paul Thomas, in a Friday upgrade of the company's rating to 'buy' and a 15% price target increase to $68.
In his upgrade, Thomas argues that ADP has already outperformed earnings expectations that should run lock step with overall employment numbers, and that the Roseland, NJ-based firm is in an industry leading to profit from future job creation.While overall private payrolls are off 3.6% since Jan. 2008, ADP's shares have beat the S&P 500 by 4,100 basis points, significantly beating its underperforming rival Paychex. "The difference, in our view, is cycle-to-cycle earnings power driven by better products, technology, and capital allocation," notes Thomas. ADP also holds a strong position in a recovering jobs market because of its recently launched platforms like WorkforceNow and Vantage HCM, and its shareholder friendly approach to share buybacks and dividends. "Over the past five years ADP has generated a 24% total return, 8% in accretive share repurchases and 16% in dividends," notes Thomas. Of course, the biggest factor in Thomas's upgrade is an expectation that overall business payrolls will increase in coming quarters and years. Currently, ADP controls 17% of the $14 billion U.S. payroll processing market - a market position roughly double that held by Paychex, the industry second. According to Goldman's forecasts, as overall private sector payrolls increase by roughly 4 million to about 115 million by January 2014, ADP may see its EPS increase 50% compared to 2008, when employment reached a pre-crisis peak. In contrast, Paychex may only see a 10% benefit, giving it a hold rating, according to Goldman. In Friday afternoon trading, ADP shares were up over 1% to $59.53, posting similar sized gains to Paychex, which rose 0.6% to $33.57. Year-to-date, both companies have gained over 10%, in line with overall market gains. On Friday, the Dept. of Labor said the U.S. unemployment rate unexpectedly fell to 7.8% after the economy added 114,000 workers in September and August payroll figures were revised upward to 142,000. The report, which came in line with economist forecasts, puts the unemployment rate at the lowest levelssince President Barack Obama took office in January 2009. Morgan Stanley chief U.S. economist David Greenlaw characterized the September jobs numbers on Twitter as a "strong report." Greenlaw highlighted payroll gains in-line with expectations, but said other aspects in the report, including the unemployment rate came in much better than expected. "Hours and earnings were much better than expected, which is supportive of income growth," wrote Greenlaw on Twitter. Greenlaw and many others noted that the big headline of the day - the drop in the unemployment rate below 8% -- was a result of big employment gains in the household survey, where the rate is derived. In contrast to 114,000 new nonfarm payroll jobs, the household survey showed an 873,000 gain in employment, pushing the unemployment rate to three year lows. In the Bureau of Labor Statistics monthly jobs report, overall job gains or losses - called total non-farm payrolls -- are taken from what's called the establishment survey of businesses. The unemployment rate, in contrast, is derived from a smaller survey of 60,000 small businesses and households, called the household survey. Jim Cramer also noted on Twitter that were the monthly jobs report to be done by private companies like SAP (SAP) and Tibco Software (TIBX) instead of the Department of Labor, payroll calculations could be done on a daily basis. "Just give the payroll calc job to $SAP or $TIBX and we can get them daily!" wrote Cramer. For more on Friday's jobs report, see why former GE chief executive Jack Welch spawned a Twitter conspiracy by questioning the accuracy of a steep fall in the unemployment report. Follow @agara2004 -- Written by Antoine Gara in New York
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