The stagnation in the equity market is both natural and expected after a successful earnings season and a solid run-up in share prices. While the trading action isn’t robust, I view the market as holding up very well all things considered. Mediocrity seems to describe the state of the economy and, with the S&P 500 Index where it is, I say that investor sentiment remains generally positive.
As I’ve been writing for quite a while, the big story this year is in the performance of large-cap companies. They have the pricing power, the cost control, and the economies of scale to grow their earnings at a faster rate than the economy can provide. This happened last year, and it’s happening again this year. Big companies can keep this up for a while longer, but eventually the economy is going to have to start generating more growth or the earnings machine will begin to break down.
The data on employment are encouraging. All you have to do is follow the stock price of Automatic Data Processing, Inc. (NASDAQ/ADP) if you want a good read on private sector employment. ADP is another one of my benchmark companies that I follow regularly. It’s a large-cap business whose operations provide real insight into the state of the economy. If you don’t know already, ADP is one of the largest human resources and payroll management companies in the U.S. Generally referred to as a “business outsourcing services” company, what ADP says about its business is the real window on non-government employment.
This stock has really done well lately, and it’s up about $15.00 a share since last September. It took a while to get recognized in the marketplace, but it was a good trade on improving employment conditions.
In its latest quarter, the third fiscal quarter of 2011 ended March 31, 2011, ADP reported revenues of $2.7 billion, representing growth of 12% over last year, of which seven percent was organic. In my view, that is solid growth for such a large company. Earnings from continuing operations grew six percent and diluted earnings per share from continuing operations were $0.85, for a gain of eight percent over the comparable quarter. Company management expects about six percent in organic revenue growth in 2011, which is one percent higher than previously forecast. Including acquisitions, the company expects about 10% in total revenue growth for the year, up from previous guidance of nine percent. Diluted earnings per share should improve between six percent and seven percent.
So, if business is improving at ADP, private sector employment is growing in the economy. Like following railroad companies, a payroll service company like ADP is another great benchmark. The stock market is churning, but employment fundamentals are getting better, and that’s the best signal of all.