Is Xerox Undervalued?

With shares of Xerox (NYSE:XRX) trading around $9, 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:

T = Trends for a Stock’s Movement

Xerox provides a portfolio of business process and information technology outsourcing support, document technology and solutions. Through the company’s business process and information technology outsourcing, it offers global services from claims reimbursement, electronic toll transactions, management of human resource benefits and customer care centers, and the operation of a company’s technology infrastructure. Xerox operates in three business segments: Services, Technology, and Other. Companies are growing at explosive rates worldwide and they need support from companies who have already dealt with these situations. Look for Xerox to continue supporting businesses in growing economies worldwide.

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T = Technicals on the Stock Chart are Strong

Xerox stock has not done very well over the last several years. The stock is currently climbing higher and may be headed towards multi-year highs. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Xerox is trading above its rising key averages which signal neutral to bullish price action in the near-term.

XRX

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Xerox options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Xerox Options

28.39%

23%

20%

What does this mean? This means that investors or traders are buying a small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

June Options

Flat

Average

July Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Xerox’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Xerox look like and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

21.05%

4.13%

-4.55%

0%

Revenue Growth (Y-O-Y)

-2.67%

-0.69%

-2.87%

-1.30%

Earnings Reaction

-1.86%

2.24%

-5.12%

-6.81%

Xerox has seen mostly increasing earnings and while revenue has decreased over the last four quarters. From these figures, the markets have been disappointed with Xerox’s recent earnings announcements.

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P = Excellent Relative Performance Versus Peers and Sector

How has Xerox stock done relative to its peers, Accenture (NYSE:ACN), Canon (NYSE:CAJ), Hewlett-Packard (NYSE:HPQ), and sector?

Xerox

Accenture

Canon

Hewlett-Packard

Sector

Year-to-Date Return

32.33%

24.92%

-5.23%

48.63%

21.84%

Xerox has been a relative performance leader, year-to-date.

Conclusion

Xerox provides valuable information technology as well as document technology products and services to consumers and growing companies worldwide. The stock has not done too well over the last few years but has seen a nice year-to-date pop. Over the last four quarters, earnings have seen an overall rise while revenue has declined, which has disappointed investors. Relative to its peers and sector, Xerox has been a year-to-date performance leader. Look for XEROX to OUTPERFORM.

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