'Sleeper' Tech Plays

By Declan Fallon - April 13, 2012 | Tickers: ADP, PAYX, TXN | 0 Comments

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While I think the Energy sector currently offers the best value (see my earlier post on these two Energy stocks) it’s not the only sector offering bargains.  Technology and Industrials, key economic bell weather sectors, have been experiencing weakness greater than observed in other sectors.  This tends to suggest a rotation out of speculative issues towards more resilient – and defensive – sectors such as Consumer Staples and Health Care stocks.  But where there is trouble there is also opportunity for value seekers. 

At first glance, the Technology sector looks in great shape, but this is down to the efforts of Apple.  When one digs a little deeper, the sector is one in transition.  However, some stocks have been quietly going about their business without attracting too much attention. 

Automatic Data Processing (NASDAQ: ADP) is a business software and services provider, although according to Trefis, 88% of its stock price is attributed to its Payroll Processing division. ADP's recent price action has been muted.  Potential buyers wary of a repeat of last summer's trading when the stock fell from a high of $55 to a nerve wracking $45 in the space of a few weeks.  However, it's this fear which can be used to build a position the stock under the dollar-cost-average approach.  The company will soon be releasing Q3 earnings on May 1^st;  Q3 for the company was a bumpy quarter in 2011 with a reported EPS of 0.85.  Wall Street projects it will outdo itself again, this time with an estimate of 0.93.  But what are the prospects for Q3?

Competitor Paychex (NASDAQ: PAYX) recently reported its Q3 with a 7% growth in service revenue.  Paychex has a heavy U.S. exposure to Small and Medium Businesses, sectors less resilient to recessionary conditions and more likely to layoff staff or close completely, so the initial prognosis for ADP in this regard is good.  ADP also has a global reach and a larger client base, which to a degree, protects it from exposure to weak U.S. and European economies (but can also benefit from any growth in these regions).   Unemployment has been steadily falling which will help boost ADP's bottom line.  But at 8.2% there is still a long way to go. High unemployment means a significant resource pool of new ADP customers to tap as they enter the workforce. The stock is better positioned to welcome a positive Q3, although the stock rarely surprises against estimates, a solid number with good guidance into the traditionally weaker Q4 could offer investors the confidence to buy. When Paychex came in at estimates there was a brief decline in price, but buyers were quick to step in a few days later.  So unlike the glory boom years when an earnings meet was considered a 'miss', buyers appear to be more forgiving in the current environment.  The CAPS Community are also keen to point to its dividend; at 2.8% it’s not going to be blowing the hats off income investors, but for a Technology stock it’s perfectly reasonable.

Texas Instruments (NASDAQ: TXN) is not one many one consider a ‘Sleeper Play’.  This $37 Billion company is currently trading in the low end of a $32-34 range.  It's relatively quiet price performance helped disguise what was in effect a 2011 summer rout.  Steady declines in quarterly earnings; from a high $0.71 in Q3 2010 to a current estimate of $0.39 for Q4 2011, have limited its appeal - although for the past three quarters it has successively beaten estimates.  Dragging it down has been its heavy earnings exposure to chip user, Nokia.  But the beat down on Nokia may have hidden Texas Instruments best chance of gaining.  While plenty of emphasis has been placed on Nokia's Smartphone failings, its Nokia's Emerging Market exposure, which according to Trefis accounts for 38% of its stock price (compared to just 12% for its 'Developed Markets'), which is likely to help both companies in the long run.  Besides the need for affordable phones in the emerging market, there is also an infrasturture consideration in supporting large numbers of smartphones.  At some point, investors will get this story and start gobbling up both stocks, but until this happens tunnel vision will keep attention focused on its smart phone offerings, where neither company can compete with Apple or the Android world.  The diversification of Texas Instruments makes it a better fit than Nokia, but risk takers will probably prefer the latter.  The 2.1% dividend doesn’t hurt either.

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