Jensen Investments: Holdings Update – Welcome Back ADP
H/T Dataroma
We are pleased to welcome back ADP, the cloud-based, human capital management company, to the Jensen Quality Growth Fund. ADP was one of the Fund’s longest term holdings (at almost 20 years) but was sold in late 2014 for valuation reasons.
We have always believed that ADP is a fundamentally strong company. However, we strive to own shares in high quality businesses such as ADP only if those shares are attractively priced. Since being sold by Jensen, the company’s relative valuation has become more attractive due to its modest stock price appreciation and continued strong earnings growth. We believe now is a good time for ADP to be returned to the portfolio based on a more favorable valuation and its unwavering fundamentals.
When Jensen originally added ADP to the portfolio it was a traditional payroll processing company that serviced large domestic and multinational companies. The company has since evolved into a human capital management company with an expanded portfolio of broad service offerings delivered through the cloud to small to large multinational companies. In addition, ADP has further enhanced shareholder value as it has continued to migrate customers to its cloud-based payroll processing and human capital management services platform.
ADP has also levered up its balance sheet for strategic purposes as well as increased share buybacks. In early September 2015, the company went from having virtually no debt to $2 billion in debt. However, we conclude that the company’s balance sheet can amply accommodate that debt, and that the company is more valuable to shareholders with its new capital structure. We at Jensen consider ADP a great core holding due its strong fundamentals and compelling valuation.
