Shares of Xerox (XRX) closed up 1.4% Tuesday, rebounding from losses in pre-market trading after the company announced a $100 million restructuring charge in the fourth quarter and lowered its full-year earnings outlook.
The change in market sentiment no doubt came as investors looked past the headline and digested the good news Xerox planned to deliver at today's investor conference. The company guided for modest revenue growth and 10 percent growth in earnings per share, with 2013 guidance set at $0.94-$1 on a GAAP basis, and $1.09-$1.15 on an adjusted basis. That compares to $0.88 and $1.03, respectively, for 2012 at the midpoint of the company's updated Q4 guidance.
Xerox management also announced it plans to spend "at least" $400 million on share repurchases -- after roughly $1 billion spent in 2012 -- and raised its dividend for the first time since the payout was re-instituted in late 2007. With a quarterly dividend of 5.75 cents, XRX now yields a handsome 3.6% annually.
Xerox is obviously not a high-flying tech company, and even a casual observer of markets would realize that its legacy printing and copying businesses are facing a sea change, as the need for those services diminish in the Internet age. But at Tuesday's close of $6.42 per share, the company is trading just off a 52-week low, and is approaching levels not seen since the tail end of the 2008-09 market crash. It's hard to see why. The company's balance sheet could be better; but net debt of $6.65 per share is acceptable, and the company has lowered its debt by about $1.5 billion since the end of 2009. The company's technology segment -- which includes its legacy copying and printing products -- is declining, falling 7 percent in constant currency during the third quarter [pdf]. But the services segment -- largely the legacy of Xerox's 2009 acquisition of Affiliated Computer Services -- grew 6 percent in the quarter, despite weakness in European and government customers.
Flat revenue is not the most enticing reason to buy a stock, but given Xerox's valuation, it should certainly be acceptable. XRX is trading at just 6.6x the midpoint of 2013 guidance, and its free cash flow numbers are even more impressive, given its $8 billion market capitalization:
|Year||FCF (MM USD)|
1 -- midpoint of company guidance after Q3 of operating cash flow of $2.0-$2.3 billion, and previously issued full-year capex guidance of $500 million
2 -- from company guidance of $2.1B-$2.4B in OCF, $0.5B in capex, given in "Shareholder Value" presentation at investor conference, 11/13/12
2008-2011 data courtesy Google Finance
The 2009-10 figures were both boosted by substantial working capital adjustments, which more modestly lowered FCF in 2011 and so far in 2012; smoothing out WC, the cash flow generated by Xerox has grown steadily, if not spectacularly. Given Xerox's $8 billion market cap, and even its enterprise value below $17 billion, the cash flow numbers are excellent. They provide Xerox with the financial flexibility to lower its debt -- another $1 billion comes due in 2013 -- repurchase its shares, and return capital to shareholders in the form of a dividend which now yields over 3.5 percent.
The bearishness toward Xerox is understandable; with its technology segment facing fears of obsolescence, and even its services segment exposed to the struggling IT segment, a lower valuation makes sense. But Xerox already has that valuation; it's getting more and more difficult to argue that the risks facing the company aren't already priced in. It's not a sexy play; it's not a "screaming double" or a "ten-bagger" or any of the other terms stock touts like to use. But it is creating steady growth amidst a challenging environment; it is returning hundreds of millions of dollars to shareholders in the form of repurchases and dividends; and it's still an S&P 500 company with one of the most famous brands in the world, and a solid management team that has positioned the company to survive even as the copier business sees a structural decline. And it's trading at less than seven times forward earnings. That's just too cheap, even for a company that is not going to post spectacular growth. At $6.42 per share, Xerox doesn't have to grow very much to be an excellent long-term value.