Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
The Federal Reserve and Inflation - 16th Jun 21
Inflation Soars 5%! Will Gold Skyrocket? - 16th Jun 21
Stock Market Sentiment Speaks: Inflation Is For Fools - 16th Jun 21
Four News Events That Could Drive Gold Bullion Demand - 16th Jun 21
5 ways that crypto is changing the face of online casinos - 16th Jun 21
Transitory Inflation Debate - 15th Jun 21
USDX: The Cleanest Shirt Among the Dirty Laundry - 15th Jun 21
Inflation and Stock Market SPX Record Highs. PPI, FOMC Meeting in Focus - 15th Jun 21
Stock Market SPX 4310 Right Around the Corner! - 15th Jun 21
AI Stocks Strength vs Weakness - Why Selling Google or Facebook is a Big Mistake! - 14th Jun 21
The Bitcoin Crime Wave Hits - 14th Jun 21
Gold Time for Consolidation and Lower Volatility - 14th Jun 21
More Banks & Investors Are NOT Believing Fed Propaganda - 14th Jun 21
Market Inflation Bets – Squaring or Not - 14th Jun 21
Is Gold Really an Inflation Hedge? - 14th Jun 21
The FED Holds the Market. How Long Will It Last? - 14th Jun 21
Coinbase vs Binance for Bitcoin, Ethereum Crypto Trading & Investing During Bear Market 2021 - 11th Jun 21
Gold Price $4000 – Insurance, A Hedge, An Investment - 11th Jun 21
What Drives Gold Prices? (Don't Say "the Fed!") - 11th Jun 21
Why You Need to Buy and Hold Gold Now - 11th Jun 21
Big Pharma Is Back! Biotech Skyrockets On Biogen’s New Alzheimer Drug Approval - 11th Jun 21
Top 5 AI Tech Stocks Trend Analysis, Buying Levels, Ratings and Valuations - 10th Jun 21
Gold’s Inflation Utility - 10th Jun 21
The Fuel Of The Future That’s 9 Times More Efficient Than Lithium - 10th Jun 21
Challenges facing the law industry in 2021 - 10th Jun 21
SELL USDT Tether Before Ponzi Scheme Implodes Triggering 90% Bitcoin CRASH in Cryptos Lehman Bros - 9th Jun 21
Stock Market Sentiment Speaks: Prepare For Volatility - 9th Jun 21
Gold Mining Stocks: Which Door Will Investors Choose? - 9th Jun 21
Fed ‘Taper’ Talk Is Back: Will a Tantrum Follow? - 9th Jun 21
Scientists Discover New Renewable Fuel 3 Times More Powerful Than Gasoline - 9th Jun 21
How do I Choose an Online Trading Broker? - 9th Jun 21
Fed’s Tools are Broken - 8th Jun 21
Stock Market Approaching an Intermediate peak! - 8th Jun 21
Could This Household Chemical Become The Superfuel Of The Future? - 8th Jun 21
The Return of Inflation. Can Gold Withstand the Dark Side? - 7th Jun 21
Why "Trouble is Brewing" for the U.S. Housing Market - 7th Jun 21
Stock Market Volatility Crash Course (VIX vs VVIX) – Learn How to Profit From Volatility - 7th Jun 21
Computer Vision Is Like Investing in the Internet in the ‘90s - 7th Jun 21
MAPLINS - Sheffield Down Memory Lane, Before the Shop Closed its Doors for the Last Time - 7th Jun 21
Wire Brush vs Block Paving Driveway Weeds - How Much Work, Nest Way to Kill Weeds? - 7th Jun 21
When Markets Get Scared and Reverse - 7th Jun 21
Is A New Superfuel About To Take Over Energy Markets? - 7th Jun 21
Why Tether USDT, Stable Scam Coins Could COLLAPSE the Crypto Markets - Black Swan 2021 - 6th Jun 21
Stock Market: 4 Tips for Investing in Gold - 6th Jun 21
Apple (AAPL) Summer Correction Stock Trend Analysis - 5th Jun 21
Stock Market Sentiment Speaks: I 'Believe' We Rally Into A June Swoon - 5th Jun 21
Stock Market Russell 2000 After Reaching A Trend Channel High Flags Out - 5th Jun 21
Money Is Cheap, Own Gold - 5th Jun 21
Bitcoin and Ravencoin Cryptos CRASH Bear Market Buying Levels Price Targets - 4th Jun 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Investor Alert: Xerox is a Cash Machine

Companies / Investing 2012 Mar 14, 2012 - 03:25 AM GMT

By: Vitaliy_Katsenelson


On the surface Xerox Corp. smells a lot like its Nifty 50 brethren, once-hotter-than-the-sun-but-now-bankrupt Eastman Kodak Co. and Polaroid Corp. Its stock has gone nowhere since forever. But Xerox was not your typical overvalued blue chip of the 1990s, like Cisco Systems, Johnson & Johnson and Microsoft Corp., whose earnings have tripled or quadrupled since then — the kind of stocks I have advocated in this column. Xerox was very pricey in the late ’90s, but its revenue and earnings per share have since declined. And to make matters worse, printing and copying is just so analog, so last century. It is hard to get excited about a company making equipment whose main trick is putting ink on paper. However, all these negative optics have resulted in one misunderstood company and a very mispriced stock.

Though we think of Xerox as a company that sells copiers, that represents only 20 percent of its revenue. About one third of revenue comes from selling toner and servicing copiers — a beautiful, high-margin, annuity­like business. Look around your desk, and you’ll still see plenty of paper; the death of printing and copying has been greatly exaggerated. It is very ungreen of us, but we still copy and print.

Xerox’s story gets better. About half of its revenue comes from services. Xerox is a giant in the document-outsourcing business, which provides about one sixth of its revenue. Corporate customers, sick of paper cuts and spilled toner, realize that managing copiers and printers is not their core competency, so they let Xerox take care of that. This has been a very nicely growing business, up 6 percent in the fourth quarter.

About one third of Xerox’s revenue comes from its business-process-outsourcing service. Xerox got into this business in 2010 when it bought Affiliated Computer Services. It paid fair value for ACS, but it had to issue a lot of undervalued stock to finance the purchase. ACS was touted as a transformative acquisition for Xerox; unlike most such acquisitions, which often destroy value, this one is turning out to be as good as Xerox’s management proclaimed it to be. Xerox helped ACS go international; ACS gave Xerox access to its domestic customers. This acquisition has resulted in several hundred new deals. The integration has gone smoothly. The CEO of ACS is still running the business, and new-contract signings are up by double digits.

Last year was not kind to Xerox. The company sources $2 billion worth of parts from Japan each year and got hit hard by the earthquake and tsunami, which created supply shortages. Xerox had to fly copiers to its customers to make sure they got them on time; its gross margins took it on the chin. In addition, the relentless ascent of the Japanese yen — up 50 percent against the dollar in three years — hurt Xerox’s cost of goods sold. But tsunamis are unlikely to become annual events, and the yen will probably decline in the long run given that Japan is the most indebted nation in the world, has one of the oldest populations and is very dependent on the health of the shaky Chinese economy.

Declining interest rates resulted in a lower pension discount rate and forced Xerox to contribute $200 million to pension assets. But pensions will turn from a headwind into a tailwind in the future: First, Xerox closed its defined benefit plan in 2011; second, though interest rates may decline further, in the long run they’ll likely rise, boosting Xerox’s cash flows.

At first blush, Xerox appears to have a very leveraged balance sheet, laden with $8.6 billion of debt. However, $6 billion of it is finance debt that is secured by equipment and leveraged 7-to-1 (if our banks had had this leverage, we would not have had a financial crisis). Xerox has $2.6 billion in corporate debt, which it can pay off in a little more than a year from its free cash flow.

Because 80 percent of Xerox’s revenue is an annuitylike stream, the company is a cash machine, spitting out about $2 billion of free cash flow a year. Management has been very specific on what it intends to do with the cash: pay down debt, continue to pay a dividend (the stock currently yields about 2 percent), spend about $1 billion on stock buybacks and make a few small tuck-in acquisitions. Xerox will be able to buy 8 to 10 percent of its shares outstanding this year.

The company’s service revenue should continue to grow 5 to 10 percent a year; assuming the copier business is flat, overall revenue should grow in the low single digits. As profit margins rise, Xerox should be able to grow earnings in the midteens without doing much heavy lifting. The best part is that the current valuation of less than six times free cash flow sets the bar very low for this company. It needs to show proof of life (of which it has plenty), not proof of growth. 

Vitaliy N. Katsenelson, CFA, is a portfolio manager/director of research at Investment Management Associates in Denver, Colo.  He is the author of “Active Value Investing: Making Money in Range-Bound Markets” (Wiley 2007).  To receive Vitaliy’s future articles my email, click here.

© 2012 Copyright Vitaliy Katsenelson - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in