Is Xerox’s Stock a Buy Now?

With shares of Xerox Corp. (NYSE:XRX) trading at around $8.18, is XRX an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Yes, Xerox is a document management services company, but it’s also a business process company, and an IT outsourcing company. Actually, if you look at the company’s profile, document management services is listed last of the three, which was no doubt done on purpose. Xerox is trying hard to shed its old image, but to be blunt, it’s not working.

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When it comes to business process, Xerox is heavily invested and involved. Xerox offers human resource services, finance and accounting, healthcare, technology-based transaction services, and transportation solutions. Xerox purchased Affiliated Computer Services in 2009. Since margins have been low, some people would say this investment was a mistake, but it’s really too early to tell. The biggest selling point is that this investment has allowed Xerox to form long-term contracts with the government. We’ll see how it plays out. For now, let’s take a look at some aspects of the business that are easier to read…

The first thing you should know is that Xerox is one of the most innovative companies in the world. If you just said to yourself, What in the world are you talking about? — that’s a common reaction. Unbeknownst to most people, Xerox filed for 1,215 patents in 2012. That holds a lot of potential. Then again, potential doesn’t always lead to results. We’ll get to that a little further along. And don’t worry, it’s not that far. This is a short article.

As far as earnings go, Q4 revenue was $5.92 billion versus an expectation of $5.88 billion. Net income also beat expectations, but $335 million was a decline from $375 million in Q4 2011.

Let’s take a look at some more important numbers for Xerox prior to forming an opinion on the stock’s most likely direction…

E = Equity to Debt Ratio Is Normal

Erase Debt

The debt-to-equity ratio for Xerox is normal, but the balance sheet isn’t attractive. Debt has been an issue for Xerox for many years. The good news is that cash flow is strong.

Debt-To-Equity

Cash

Long-Term Debt

XRX

0.71

$1.25 Billion

$8.49 Billion

LXK

0.50

$859.30 Million

$649.40 Million

CAJ

0.00

$7.90 Billion

$27.19 Million

 

T = Technicals on the Stock Chart Are Strong

Xerox has performed well over the past few months. Over the past year, it has outperformed Lexmark International Inc. (NYSE:LXK) and Canon Inc. (NYSE:CAJ). However, Xerox yields 2.20 percent whereas Lexmark yields 4.20 percent and Canon yields 4.10 percent. It should also be noted that Xerox’s performance over the past three years is extremely poor considering the remarkable performance of the broader market over that time frame.

1 Month

Year-To-Date

1 Year

3 Year

XRX

15.64%

16.28%

3.34%

-5.07%

LXK

20.45%

21.39%

-16.09%

8.25%

CAJ

-5.59%

-5.64%

-18.11%

-10.67%

 

At $8.18, Xerox is currently trading above all its averages.         

50-Day SMA

7.01

100-Day SMA

7.09

200-Day SMA

7.26

 

E = Earnings Have Been Steady

Earnings and revenue have remained range-bound for many years.

2008

2009

2010

2011

2012

Revenue ($)in billions

17.61

15.18

21.63

22.63

22.39

Diluted EPS ($)

0.26

0.55

0.43

0.90

0.88

 

We already know what happened this quarter. Now let’s take a look at what happened in previous quarters as well.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue ($)in billions

5.96

5.50

5.54

5.42

5.92

Diluted EPS ($)

0.27

0.19

0.22

0.21

0.26

 

T = Trends Support the Industry

Xerox is now involved is so many different businesses that it would be difficult to determine whether or not trends support the industry. However, since guidance was strong, we can assume that Xerox is confident about its future prospects.  

Conclusion

Most people don’t realize that Xerox is a consistently profitable company. They also might not be aware that Xerox expects business to improve, or that the current valuation is very attractive with a Trailing P/E of 9.01 and a Forward P/E of 6.66. These are all positives. On the other hand, many people also don’t know that according to Glassdoor.com, CEO Ursula Burns has the lowest employee approval rating of any CEO in any industry at just 27 percent. This lack of quality leadership has led to many disgruntled employees. If you read the reviews, you will see that while goals are clear-cut, employees are treated poorly and are looked at as disposable at any time, and for any reason. This type of culture cannot and will not lead to quality long-term results. Even if you don’t consider that an important factor, Xerox has spread itself too thin to be able to show sustainable growth.

While Xerox has upside potential, it will likely remain nothing more than potential. Xerox is a WAIT AND SEE. This story is worth revisiting in the future.

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