Print Some Dollars in Your Portfolio With Xerox Stock

Source: SAJJAD HUSSAIN/Getty IMages

Source: SAJJAD HUSSAIN/Getty IMages

Xerox Corp (NYSE:XRX) is a very well-known company whose stock offers growth and a 2 percent yield. The stock is trading right at its fifty-two-week high, but the question is, can the momentum continue? Xerox faces tough competition Canon (NYSE:CAJ) as well as Hewlett Packard (NYSE:HPQ).

While Xerox is a more specialized company than Canon and Hewlett-Packard, much of the company’s business overlaps. Xerox specifically provides business process and document management solutions. The company’s Services segment offers various business process outsourcing services, including administrative and care management solutions to state Medicaid programs and federally-funded government healthcare programs as well as healthcare payer and pharmaceutical services, healthcare provider solutions for hospitals, doctors, and other care providers.

It also offers human resources services, finance, accounting, and procurement services, customer care services, technology-based transactional services for retail, travel, and non-healthcare insurance companies. It also provides information technology outsourcing services comprising managed IT services consisting of administration, database administration, systems monitoring, batch processing, data backup, network and infrastructure management, and capacity planning. In addition, this segment offers document outsourcing services, such as managed and centralized print services.

The company’s Document Technology segment competes more directly with both Canon and Hewlett Packard. This is because it provides desktop monochrome and color printers, multifunction printers, copiers, digital printing presses, and light production devices. It also offers production printing and publishing systems for the graphic communications marketplace and large enterprises, as well as toners, inks, and Xerox replacement cartridges. But is the stock itself a buy going forward?

Well, in Xerox’s most recent quarter, total revenue of $5.3 billion was down 2 percent versus the same quarter last year. Revenue from the company’s Services business, which represented 57 percent of total revenue, was $3.0 billion, up 2 percent year-over-year. Revenue from the company’s Document Technology business, which represented 40 percent of total revenue, was $2.1 billion, down 6 percent. This revenue, minus expenses led to adjusted earnings per share of 27 cents. Adjusted earnings excludes 5 cents related to amortization of intangibles, resulting in GAAP earnings per share of 22 cents.

Other key metrics are improving. Operating margin was 9.7 percent and this was an improvement of 0.3 points year-over-year. Furhter operating profit was $514 million, up 1 percent. Gross margin was 30.8 percent, and selling, administrative and general expenses were 18.4 percent of revenue, numbers that were better than expected.

Cash wise, the company is in good shape. 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. Additionally, Xerox spent $227 million on acquisitions in the quarter and $281 million in the first half of the year, strengthening its Services segment portfolio, which seems to be the future of this company’s growth. Ursula Burns, Xerox chairman and chief executive officer, stated:

“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.”

Looking ahead, Xerox is right at its 52-week high. Many times, this is the place to buy a stock. In the case of Xerox, I think it is a buy given the growth in its services segment. I would however wait for a pullback before getting in. For the third-quarter 2014, Xerox expects GAAP earnings per share to be 21 to 23 cents per share. Third-quarter adjusted earnings are expected to be 25 to 27 cents. For the full-year 2014, GAAP earnings per share should come in at 92 to 96 cents and full-year adjusted earnings should be $1.09 to $1.13.

Disclosure: Christopher F. Davis holds no position in any stocks mentioned and has no intentions to initiate a position in the next 72 hours. He has a tentative buy rating on Xerox and a $15.75 price target.

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