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Oak Value's New Pick in Payrolls, Longtime Play in Gases

Gregg Wolper

Gregg Wolper: You mentioned earlier talking about the economy that unemployment was still high, and that is a concern. For that reason, it was interesting to see that you bought recently ADP, a payroll processor that has some other businesses.

I think many people would think that would be an unusual choice when unemployment is so high, and most experts expect it to continue to be high or even higher for quite some time. Tell us why you bought ADP.

David Carr: One of the things we find over time is that you rarely get a chance to buy a great company at a cheap price. ADP has got a great history of producing wonderful profit margins, great drop to the bottom line, produces lots of cash flow. They've been good at allocating that cash flow, buying back stock.

Importantly, the management currently we think is quite adept. They've spun off some businesses where they didn't have the kind of leverage and scale to provide consistent operating income increases that you're getting at the businesses that they own now, which are the employment area, employment processing, as well as dealer services.

If you think about it, there probably aren't two areas that are as tough as dealer services with working with auto dealers and...

Wolper: Tell us what they do with auto dealers.

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Carr: They provide everything from the entire plan of how they handle inventory management to software to allow them to work on how they put their autos out on the Web, how they can manage advertising.

They have modules. They have some base operations that most dealers need to run the business, but then also a lot of add-on modules, which is a common theme to ADP. On the employment side, they have add-on modules, whether it be human resource, whether it be retirement, or insurance.

So their idea is they are extremely efficient, and they can make very good margins on bringing a customer in. They've got good retention, and they sell these other modules in. They over time have really strong characteristics of reoccurring revenue growth.

They also have some international exposure that, while not that profitable yet, has got tremendous scale in some of the global, large multinationals, and we think it's going to be a great winner long-term.

Wolper: Another company that you've owned for a long time--ADP is a new purchase--but a company you've owned for years is Praxair. That may not be quite as well known. I'm interested in the case for Praxair.

Clearly you think there's a very good case because you've had it for many, many years. Could one of you tell us briefly about Praxair?

Larry Coats: In the case of Praxair, Praxair is a specialty atmospheric gases company. They basically are taking air in most cases and extracting gases that can be used either in the medical field or in refineries, for example, in manufacturing.

This is a business that long term is extremely predictable as a result of the fact that they have contracts with their customers that in many cases are 15-year take-or-pay contracts.

So that gives them the ability to recover a base return on invested capital out of the initial contracts, and then their add-on services give them the ability to add more value over time.

This is an interesting call on industrial production on a global basis. The business has performed extremely well in the materials sector for us over the last six months and the last year, but we've owned it for a very long time.

It remains one of the most predictable businesses that we have in the portfolio. Not as cheap today as it might have been a few months ago, but still one of the premium businesses and clearly an advantaged business model from our standpoint.

Carr: And one of our best management teams. As you well know, we spend a lot of time thinking about management: how do they allocate capital, how do they treat us as shareholders and owners of the business, and Praxair has one of the best management teams we've seen out there.

They're quite adept at allocating capital. They're very good about thinking about risk. They're the class act of the industrial gas business, and they earn accordingly very good returns.