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Summary

  • Management has a new focus on growth while working to bring more innovative capabilities to the operation.
  • The company has made decent progress despite struggles in its outsourcing services segment, which is the company's largest division.
  • On the basis of 2015 earnings per share estimates of $1.22 Xerox is trading at a P/E of 9, which is 5 points below the industry average of 14.

Over the past 6 months, shares of Xerox (NYSE:XRX) have risen close to 20% since reaching an October low of $9.61. Investors have begun to question if Xerox, which is known for its copiers and printers, can duplicate its history of strong revenue and earnings performances. But it hasn't always been easy.

The company has made decent progress despite struggles in its outsourcing services segment, which is the company's largest division. The decline in October arrived as management warned that profits for this January quarter would come below expectations. This was due to (among other things) restructuring-related charges. Surprisingly, things weren't as bad as expected.

Not only did Xerox report a slight improvement in revenue and profits, management rewarded investors by unveiling plans to increase shareholder value through earnings growth. One of the ways Xerox plans to achieve this is by integrating its Managed Print Services, or MPS, with business process and IT outsourcing to match the increasing demand for connectivity and mobility in printing solutions.

Essentially, management is adjusting to changing trends. This was once perceived an area of weakness. But with a new focus on growth in the company's services segment, not to mention innovation, Xerox is no longer the dormant company for which that it has become known. And despite the 20% increase in the past six months, patient investors can still do well here. And these potential gains will be affirmed Tuesday with the company's first-quarter earnings results.

Despite an expected dip in profit, analysts are generally optimistic about their expectations. The consensus earnings per share estimate is 23 cents per share. For the full year, analysts are looking for earnings of $1.13, which is expected to grow year over year by roughly 4%.

From the standpoint of revenue, analysts will be looking for a slight 4% decrease to $5.15 billion for the quarter. Last year Xerox posted revenue of $5.36 billion. For the full year, revenue is projected to come in at $21.48 billion. Despite the expected dip, it's worth noting that the company's revenue increase in the fourth quarter preceded two straight quarters of revenue declines.

This indicates that management's recent restructuring has begun to work. The same goes for profitability, of which Xerox has posted increases in two consecutive quarters, including a 3% year-over-year increase in the January quarter and the 1% increase in the third quarter.

What's more, despite recent complaints about slowing growth and rising threats from rivals like Hewlett-Packard (NYSE:HPQ) and Lexmark (NYSE:LXK), Xerox has not been sitting on its hands. To its credit, Xerox has listened attentively and has responded with several acquisitions over the past couple of years. One of these buys was software-as-a-service (SAAS) company Customer Value Group, which was picked off last year for an undisclosed amount.

This deal supports management's focus on growth of the services segment, while bringing more innovative capabilities to the operation. The key to Xerox's direction, however, will be the extent to which management can continue expanding margins. This is what analysts will want to see on Tuesday - 60% of which rates Xerox as a buy. And I have to agree.

With Xerox stock still 80% below its all-time high, it would be a gross understatement to say that the company has seen better days. Investors have every right to be encouraged by the company's 82% gains in 2013. And the company's recent moves suggest that these shares still have more room to run.

With the stock trading at $11.43 and a trailing P/E of 12, there is significant value that still remains. On the basis of 2015 earnings per share estimates of $1.22, Xerox is trading at a P/E of 9, which is 5 points below the industry average of 14. I believe with management's growth strategies in areas like healthcare, which should help offset weakness in areas like document technology, these shares should reach $15 in the next 12 to 18 months.

Source: Why Xerox Is Heading To $15