What This Tech Stock’s Saying About the Stock Market
Thursday, February 21st, 2013
By Mitchell Clark, B.Comm. for Profit Confidential
We all know that corporate earnings are managed, but in a sense, it works, because an investor is better off having some ballpark earnings outlook over nothing. Earnings estimates for mature, large-cap businesses are typically more accurate over traditional growth companies, and you can use these estimates for your buy and sell decisions on the stock market.
One company that has a long history of providing decent guidance is Automatic Data Processing, Inc. (NASDAQ/ADP) out of Roseland, NJ. Automatic Data Processing (ADP) is a payroll processing and human resources outsourcing firm that is actually considered a technology stock. The company belongs to the NASDAQ 100 index, and I view it as a great barometer on the stock market, investor sentiment, and employment.
On the stock market, ADP has been doing great for years, though it did get ahead of itself in the late 1990s, as did so many other stocks. The “overperformance” produced underperformance in the 10 years following 2001; but normalized stock market long-term returns from this business have been good, especially with the addition of dividends.
Chart courtesy of www.StockCharts.com
In its latest earnings report for the second fiscal quarter of 2013, ended December 31, 2012, ADP reported revenue growth of seven percent to $2.7 billion. Earnings were down slightly during the quarter, but management says the company can produce top-line growth between eight percent and 10% this year, with five to seven percent in diluted earnings-per-share growth from continuing operations.
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Combined with dividends, an investor could expect a high single-digit rate of return from this stock, with the position now fully valued on the stock market.
I like following ADP, because it’s a benchmark stock and the company is usually quite accurate with its revenues and earnings guidance. Therefore, if ADP says that business is getting better, you’re pretty well assured that it is.
The stock market’s had a great start to the year; corporations are basically saying the same as they did last year, being highly conservative and non-committal about the future. The collective uncertainty in the stock market today is no longer about politics; instead, it’s about the potential for revenues and earnings growth in the first half of the fiscal year. Gross domestic product (GDP) was negative in the fourth quarter of last year; and technically, the U.S. economy could be in recession if the trend continues this quarter.
This is a very difficult stock market to be considering new positions. The market has already gone up in value, and the prospect for meaningful earnings growth is subdued. Trading volume continues to be extremely weak, and this really represents a lack of confidence in future capital gains for stocks.
I would not be buying this market at all, even though I expect stocks to keep ticking higher over the very near-term. The Federal Reserve has done all it can, and it’s up to the economy itself to generate growth. (See “Stock Market: All the Cards Have Benn Played.”) My read is that the data will continue to be low and slow for the near future. Without more earnings growth, the stock market will soon be fully valued.
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