- Xerox is generating a lot of cash; its ttm price-to-free-cash-flow ratio of 8.32 is the lowest of all S&P 500 tech stocks.
- XRX’s stock is ranked first among all S&P 500 tech stocks, according to Portfolio123’s "All-Stars: Piotroski" powerful ranking system.
- Xerox continued to deliver large sums of cash back to shareholders by stock buyback and dividend payments.
Although Xerox Corporation (NYSE:XRX) stock has significantly outperformed the market since the beginning of 2013, with a gain of 92%, in my opinion, it still has plenty of room to move up. Xerox has good valuation metrics and solid earnings growth prospects; its price-to-free-cash-flow ratio of 8.32 is the lowest of all S&P 500 tech stocks. Furthermore, XRX's stock is ranked first among all S&P 500 tech stocks, according to Portfolio123's "All-Stars: Piotroski" powerful ranking system. In addition, the company continued to deliver large sums of cash back to shareholders by stock buyback and dividend payments.
Xerox is the world's leading enterprise for business process and document management solutions. The company was founded in 1906 and is headquartered in Norwalk, Connecticut.
The table below presents the valuation metrics of XRX, the data were taken from Yahoo Finance and finviz.com.
Xerox's valuation metrics are good; the forward P/E is very low at 10.88, and the Enterprise Value/EBITDA ratio is also very low at 8.51. Xerox's ttm price-to-free-cash-flow ratio of 8.32 is the lowest of all S&P 500 tech stocks. Moreover, the stock is trading near book value; price to book value is low at 1.23, and the price to sales is very low at 0.71.
Latest Quarter Results
On July 25, Xerox reported its second-quarter 2014 financial results, which beat EPS expectations by $0.01 (3.80%) and slightly missed Street's consensus on revenues.
The company reported net income from continuing operations of $270 million or 22 cents per share in the second quarter of 2014 compared with $294 million or 23 cents a share in the year-ago quarter. The year-over-year decrease in earnings was primarily attributable to a decline in revenues. Total revenue of $5.3 billion was down 2 percent or 3 percent in constant currency. Revenue from the company's Services business, which represented 57 percent of total revenue, was $3.0 billion, up 2 percent year-over-year or 1 percent in constant currency. Revenue from the company's Document Technology business, which represented 40 percent of total revenue, was $2.1 billion, down 6 percent or 7 percent in constant currency.
In the report, Ursula Burns, Xerox chairman and chief executive officer said:
The second quarter demonstrates progress in executing on our strategy. In our Services business, revenue growth and margin are trending well in commercial services, document outsourcing and internationally. Services segment margin improvement was muted by continued pressure in our government healthcare business including unplanned impairment charges. Our Document Technology business continues to deliver strong profitability through a disciplined and effective approach to operations. As we enter the second half of the year, we are focused on improving on our progress and capitalizing on opportunities that will shape the success of our business.
Xerox raised its full-year EPS guidance range to $1.09-$1.13, from a prior $1.07-$1.13, largely reflecting strength in Document Technology margins.
Dividend and Share Repurchase
Xerox has been paying dividends since 1977, but had stopped its payments between 2002-2006.The forward annual dividend yield is at 1.91% and the payout ratio is only 25%. The annual rate of dividend growth over the past three years was at 8.1%, and over the past five years was at 4.8%.
Source: Charles Schwab
Since the company generates lots of cash and the payout ratio is very low, there is a good chance that the company will continue to raise its dividend payment.
The company generated $325 million in cash flow from operations during the second quarter and $611 million for the first half of 2014. In the second quarter, Xerox repurchased $204 million in stock and $479 million in the first half of the year. Xerox purchased $696 million of its shares in 2013, after repurchasing $1.05 billion of its stock in 2012.
Source: Q2 Investor Relations Handout
A comparison of key fundamental data between Xerox and its main competitors is shown in the table below.
Xerox has the lowest price-to-free-cash-flow ratio among the stocks in the group. However, Accenture plc (NYSE:ACN) has the lowest PEG ratio.
According to Portfolio123's "All-Stars: Piotroski" powerful ranking system, XRX's stock is ranked first among all S&P 500 tech stocks. The "All-Stars: Piotroski" ranking system is quite complex, and it takes into account many factors like; price-to-book value (50% weight), gross margin, debt, current ratio, return on assets, and share buybacks, as shown in the Portfolio123's chart below.
Back-testing over fifteen years has proved that this ranking system is very useful.
The charts below give some technical analysis information.
The XRX stock price is 1.63% above its 20-day simple moving average, 3.73% above its 50-day simple moving average and 13.80% above its 200-day simple moving average. That indicates a short-term, a mid-term and a long-term uptrend.
Chart: TradeStation Group, Inc.
The weekly MACD histogram, a particularly valuable indicator by technicians, is at 0.0502 and flat, which is a neutral signal (a rising MACD histogram that is crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 66.19 which do not indicate oversold or overbought conditions.
Analysts opinion is divided, among the twelve analysts covering the stock, two rate it as a Strong Buy, three rate it as a Buy, five rate it as a Hold, and two analysts rate it as an Underperform.
TipRanks is a website that ranks experts (analysts and bloggers) according to their performance. According to TipRanks, among the analysts covering XRX stock there are only seven analysts who have the four or five star rating, three of them recommend the stock, three top analysts have a Hold rating on the stock, and one analyst rates it as a Sell.
According to a press release, industry research firm Gartner, Inc. placed Xerox in the Leaders Quadrant of its 2014 Magic Quadrant for Finance and Accounting Business Process Outsourcing. The report said:
Quadrant leaders have superior market understanding, and they have a global client base, an extensive network of well-distributed and highly populated global delivery centers catering for multiple languages, a good balance of transactional and high-end F&A delivery and innovative well-communicated and marketed sales offerings.
Source: Q2 Investor Relations Handout
Since Business Process Outsourcing accounted for about 40% of revenues ($4.1 billion) in the first half of the year, achieving the leader position by Gartner research demonstrates the strength of Xerox in this segment and the strong growth prospects in this business.
Xerox is continuing this year to use its substantial cash flows to deliver shareholders with a generous return while it is decreasing debt and making new acquisitions.
Source: Q2 Investor Relations Handout
XRX's stock has performed very well this year and in 2013. Since the start of the year, XRX's stock has gained 7.5% while the S&P 500 index has risen 3.9%, and the Nasdaq Composite Index has increased 4.2%. Moreover, since the beginning of 2013, XRX's stock has gained 91.8%, while the S&P 500 index has increased 34.6%, and the Nasdaq Composite Index has risen 44.2%. Nevertheless, considering its good valuation metrics and solid earnings growth prospects, the stock, in my opinion, is not expensive.
Xerox has good valuation metrics; its EV/EBITDA ratio is very low at 8.51. Xerox is generating a lot of cash; its ttm price-to-free-cash-flow ratio of 8.32 is the lowest of all S&P 500 tech stocks. Furthermore, XRX's stock is ranked first among all S&P 500 tech stocks, according to Portfolio123's "All-Stars: Piotroski" powerful ranking system. The company continued to deliver large sums of cash back to shareholders, during the first half of 2014; the company generated $611 million in operating cash flow, paid cash dividends and repurchased its own shares for $479 million. All these factors bring me to the conclusion that XRX's stock is a smart long-term investment. Furthermore, the growing dividend represents a gratifying income.