Buy This Stock If You Believe the Rosy Jobs Report: Goldman Sachs
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.