While an extremely weak labor market is still affecting Automatic Data Processing ADP, a stabilizing trend seems to have developed over the course of fiscal 2010's first quarter. Throughout the earnings call, management was a bit more optimistic about the future as sales trends and other anecdotal evidence point to an improving trend for the rest of the fiscal year. For the first quarter, total revenue fell 4%; however, the operating margin expanded 60 basis points year over year to 19.8%. We believe management has done a great job on sustaining overall profitability in one of harshest operating environments ADP has ever faced.

The firm’s other major employment division, professional employer organization services, enjoyed another solid quarter as revenue increased 6% and the operating margin increased 180 basis points year over year to 11.9%. Encouragingly, the average number of co-employees serviced increased 3%. We find this especially impressive as other pure-play PEO firms have seen the average number of co-employees serviced fall over this same period.

The federal government's Cash for Clunkers program helped stem the negative cyclical and secular trends that have hampered ADP's dealer services division. However, revenue still declined 4% and the operating margin compressed 130 basis points to 14.5%. As the auto industry continues to struggle, we believe this division will face further head winds over the short and long term.

While ADP's results reflect the negative trends permeating the economy, we believe a stabilizing trend has been established. On the basis of employment reports from several sources and management's expectations, we expect ADP's results to improve slowly over fiscal 2010. After factoring in first-quarter results, we are leaving our fair value estimate steady.

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