Xerox Ready to Bounce Back?

By Robert Fisher - January 27, 2012 | Tickers: CAJ, HPQ, XRX | 0 Comments

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For all the talk of paperless offices and processes, it's amazing how much paper is still used and stored. That works well for Xerox Corp. (NYSE: XRX), known internationally for its printers, copiers, and scanners. It also offers the software and follow-up services that businesses need to run their administrative processes.

Despite a slow finish last year, I am convinced Xerox will make a comeback and perform well in 2012.  

Xerox shares are currently trading around $8, and the mean 12 month price target from analysts researching the stock is $9.78 (22% upside potential). This stock is trading around its 50 day exponential moving average of $8.15, and lower than its 200 day exponential moving average of $8.16. The stock has weakened since the market turned south in July and August, creating a series of lower lows and lower highs (see chart). This seems to have recently broken, and I expect the shares to move upward and through the 50 day and 200 day EMA. The 52 week price range is $6.55 to $11.50. Earnings per share for the last 12 months are $0.74, and these are expected to increase to $1.16 in its next fiscal year (ending December 2012). These numbers place the shares on a trailing price to earnings ratio of 10.59.

For investors looking at dividend paying stocks, Xerox’s payment of a dividend of $0.17 last year gives the stock a yield of 2.20%, and is covered more than four times by its earnings.

In an industry sector considered to be unexciting, competitors like Canon Inc. (NYSE: CAJ) pay a higher dividend yield (3.20%). Hewlett-Packard (NYSE: HPQ) pays a dividend that equates to a yield of 1.70%. Ricoh Co Ltd. paid a far higher dividend yield of 4.10% last year, though this is not covered by its earnings and unlikely to be so in the future.

Current operating margin at Xerox is 8.36%, with a return on assets of 3.85% and a return on equity of 8.76%. The current revenue from its income statement is $22.64 billion, and last quarter’s revenue showed year on year growth of 2.90%. Xerox currently has total cash of $785 billion, and a total of $9.20 billion in debt. The company’s debt/equity ratio is 69.30. In comparison, Canon has almost no debt, and a debt/equity ratio of just 0.63, while Hewlett-Packard’s debt/equity ratio position is similar to Xerox’s, at 78.54.

Indeed, Xerox shares have performed very poorly in the second half of 2011. Canon shares did not take the massive hit that Xerox shares did through July and August, as Xerox second quarter results also came in 10% weaker than expected: $0.22 per share versus market expectations of $0.24 per share. Since then, the shares have been unloved and under performing.

However, with the shares recently having bounced from their 12–month low, a more positive growth pattern is forming. Xerox is now trading at a discount to its book value, while its competitors are trading premiums in relation to their book values. With a yield now over 2%, I expect the shares to rise further in the coming quarters.

A look at events throughout 2011 solidify this view. On Oct. 18, the company announced that signings for its Midas+ software suite tripled in the first half of 2011. This is an offering that is being used extensively in the healthcare industry, not only proving its worth, but also belying the cutbacks in healthcare spending. Additionally, the company won a U.S. defense contract worth $103 million over five years. Xerox is also taking advantage of the current business climate to expand its worldwide businesses. In September the company announced that it is to buy XL World, boosting its outsourcing capacity across Europe.

Overall, given the share price history, fundamentals, and news from Xerox, I consider the shares to be a great value investment.

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