Is Xerox a Risky Investment?

With shares of Xerox Corporation (NYSE:XRX) trading at around $9.03, is XRX an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

First, watch this brief and clever video by Xerox. The duration of the video is only 2:02, which makes it an excellent time investment for understanding what Xerox is all about. It’s evident that the company aims to be highly innovative, but aiming for goals and reaching them are two different things. We’ll look at some important facts and numbers and then determine if Xerox is a risky investment in the current economic environment.

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Positives for Xerox:

  • Recent dividend hike
  • Share repurchase program (repurchased $1.05 billion worth of shares in 2012)
  • Strong cash flow
  • Looking to grow through acquisitions
  • Recently hired CFO Kathryn Mikells (successful track record)
  • 10,700 active patents

One of the biggest negatives for Xerox has been a slight decline in revenue on an annual basis as well as last quarter on a year-over-year basis. However, revenue improved last quarter on a sequential basis. Another big negative is that the stock is extremely sensitive to steep market corrections. It was hit hard in the 2008/2009 financial crisis, and it was one of the hardest hit stocks throughout the broader market after the tech bubble burst in 2000.

Though not as important as the information above, it’s worth noting that Xerox seems to have a subpar company culture. Based on Glassdoor.com, employees gave their employer an average rating of 2.7 of 5, which is classified as “Ok”. Only 27 percent of employees approve of CEO Ursula Burns, and only 32 percent of employees would recommend the company to a friend. The company culture could use improvement, but has it affected performance?

Let’s get to some comparative numbers. The chart below compares fundamentals for Xerox, Accenture plc (NYSE:ACN), and NCR Corp. (NYSE:NCR). Xerox has a market cap of $11.07 billion, Accenture has a market cap of $49.49 billion, and NCR has a market cap of $4.46 billion.

XRX

ACN

NCR

Trailing   P/E

10.26

17.75

30.67

Forward   P/E

7.54

16.30

8.86

Profit   Margin

5.34%

10.85%

2.55%

ROE

10.03%

61.32%

13.16%

Operating   Cash Flow

$2.58 Billion

$3.45 Billion

 -$294.00 Million

Dividend   Yield

2.50%

2.10%

N/A

Short   Position

1.40%

1.00%

1.40

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Xerox is higher than the industry average of 0.40, but it still qualifies as normal.

Debt-To-Equity

Cash

Long-Term Debt

XRX

0.71

$1.25 Billion

$8.49 Billion

ACN

0.00

$5.64 Billion

$29.00 Thousand

NCR

1.53

$1.07 Billion

$1.98 Billion

 

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T = Technicals Are Strong

Xerox has performed well year-to-date. However, it hasn’t performed as well as most stocks throughout the broader market since early 2009.

1 Month

Year-To-Date

1 Year

3 Year

XRX

4.49%

33.45%

17.41%

-6.87%

ACN

0.51%

15.77%

25.86%

87.98%

NCR

-0.18%

6.83%

24.01%

80.03%

 

At $9.03, Xerox is trading above all its averages.

50-Day   SMA

8.38

100-Day   SMA

7.75

200-Day   SMA

7.47

 

E = Earnings Have Been Steady           

Revenue had been improving on an annual basis until a slight setback in 2012. There was also a slight setback for earnings. These trends have been somewhat common throughout the broader market. It will be interesting to see what happens in 2013.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

17.61

15.18

21.63

22.63

22.39

Diluted   EPS ($)

0.26

0.55

0.43

0.90

0.88

 

Looking at the previous quarter on a year-over-year basis, revenue and earnings showed slight declines.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

5.96

5.50

5.54

5.42

5.92

Diluted   EPS ($)

0.27

0.19

0.22

0.21

0.26

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

The Information Technology Services industry is holding its own at the moment, but this industry doesn’t hold up well during difficult times. If the stock market suffers a steep correction, then Accenture is likely to hold up best out of the three companies mentioned here.

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Conclusion

There are several positives for Xerox, but with declines in revenue and earnings, and the stock’s ultra-sensitivity to steep market corrections, downside risk outweighs upside potential. If the market stays afloat, or even continues its ascent, then Xerox will likely be a winner. However, there are better options out there if this scenario plays out, and a missed opportunity is always better than a loss.

Xerox is a STAY AWAY.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I am currently short technology, financials, the Russell 2000, and the euro.

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