From his latest quarterly letter:
ADP is a high-quality business that trades at a meaningful discount to its intrinsic value due to the near-term effects of the economic downturn. We view ADP as three separate businesses: (1) a payroll processor that has been impacted by rising unemployment and a spike in the corporate default rate, (2) a client fund account that holds money on behalf of its customers ("float") which has shown declining earnings as low interest rates and recent wage deflation reduce float balances, and (3) a dealer services business that has been impacted by the unprecedented turmoil facing the U.S. automotive industry. As the U.S. economy stabilizes, we believe the headwinds facing ADP will become tailwinds. Given the operating leverage inherent in ADP's business model, ADP’s earnings should accelerate as it approaches its normalized earnings potential.
ADP's business has numerous attractive qualities: (1) given the low capital outlays required to run the business, it generates cash flow in excess of reported earnings, (2) its dominant market share and global franchise afford it with meaningful pricing power, (3) it possesses one of the few truly Triple-A balance sheets in the world, (4) the company has additional avenues for growth as it has yet to fully penetrate the global payroll/tax market and has a valuable suite of "beyond payroll" product offerings that it can cross-sell into its existing client base, and (5) it will benefit from higher interest and tax rates (higher taxes lead to greater float balances). We also respect management’s focus on shareholder value. Over the last four years, ADP has spent about $5 billion repurchasing more than 20% of its outstanding shares and paid more than $2 billion in dividends. The combination of a high quality dominant business, shareholder friendly management, and an attractive price in our experience typically leads to a good investment outcome.
Bill Ackman also built a meaningful position (over 6%) in McDonald's (MCD) during the quarter.
Here is the complete letter.