ModernGraham Annual Valuation Of Xerox Corporation

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Benjamin Clark
5.71K Followers

Summary

  • XRX is not suitable for Defensive Investors or Enterprising Investors following the ModernGraham approach.
  • According to the ModernGraham valuation model, the company is undervalued at the present time.
  • The market is implying only 3.06% earnings growth over the next 7-10 years, considerably lower than the rate the company has seen in recent years.

Xerox Corporation (NASDAQ:XRX) should attract investors initially because of its consistent earnings growth over the last several years. However, Benjamin Graham, the father of value investing, taught that the most important aspect to consider is whether the company is trading at a discount relative to its intrinsic value. It is through a thorough fundamental analysis that the investor is able to make a determination about a potential investment's merits. Here is a look at how Xerox Corporation fares in the ModernGraham valuation model.

The model is inspired by the teachings of Benjamin Graham, and considers numerous metrics intended to help the investor reduce risk levels. The first part of the analysis is to determine whether the company is suitable for the very conservative Defensive Investor or the less conservative Enterprising Investor, who is willing to spend a greater amount of time conducting further research.

In addition, Graham strongly suggested that investors avoid speculation, in order to remove the subjective elements of emotion. This is best achieved by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method, one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries.

XRX Chart

XRX data by YCharts

Defensive Investor - Must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise - Market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - Current ratio greater than 2 - FAIL
  3. Earnings Stability - Positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - Has paid a dividend for at least 10 straight years - FAIL
  5. Earnings Growth - Earnings per share has increased by at least 1/3rd over the last 10 years using 3-year averages at the beginning and end of the period - FAIL
  6. Moderate PEmg (price over normalized earnings) ratio - PEmg is less than 20 - PASS
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS

Enterprising Investor - Must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 - Current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 - Debt-to-Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability - Positive earnings per share for at least 5 years - PASS
  4. Dividend Record - Currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data

Recent Price $13.60
MG Value $24.64
MG Opinion Undervalued
Value Based on 3% Growth $13.49
Value Based on 0% Growth $7.91
Market Implied Growth Rate 3.06%
Net Current Asset Value (NCAV) -$7.13
PEmg 14.61
Current Ratio 1.38
PB Ratio 1.32

Balance Sheet - September 2014

Current Assets $7,882,000,000
Current Liabilities $5,703,000,000
Total Debt $6,355,000,000
Total Assets $27,877,000,000
Intangible Assets $11,668,000,000
Total Liabilities $16,075,000,000
Outstanding Shares 1,149,100,000

Earnings Per Share

2014 (estimate) $1.09
2013 $0.91
2012 $0.88
2011 $0.90
2010 $0.43
2009 $0.55
2008 $0.26
2007 $1.19
2006 $1.22
2005 $0.94
2004 $0.86

Earnings Per Share - ModernGraham

2014 (estimate) $0.93
2013 $0.81
2012 $0.71
2011 $0.64
2010 $0.58
2009 $0.72

Dividend History

XRX Dividend Chart

XRX Dividend data by YCharts

Conclusion:

After reviewing the data, it is clear that conservative value investors may wish to seek other opportunities. The Defensive Investor is concerned with the low current ratio, short dividend history, insufficient earnings growth over the last ten years, and high PEmg and PB ratios, while the Enterprising Investor has concerns with the high level of debt relative to the current assets. As a result, both investor types would find the company to be too risky to proceed. That said, any investor willing to speculate about the future of the company may go ahead with the next step of the analysis, which is a determination of the company's intrinsic value.

When calculating an estimate of intrinsic value, it is important to consider the historical earnings results, along with the market's implied estimate for future growth. Here, the company has grown its EPSmg (normalized earnings) from $0.58 in 2010 to an estimated $0.93 for 2014. This level of demonstrated growth is fairly strong, and significantly higher than the market's implied estimate of only 3.06%. As a result, Xerox Corporation appears to be significantly undervalued at the present time.

This article was written by

Benjamin Clark profile picture
5.71K Followers
Benjamin is one of TipRank's top bloggers.  He is the founder of ModernGraham.com, a value investing website devoted to the study and modernization of the teachings of Benjamin Graham.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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