Over the last year and a half, COVID-19 has forced businesses in just about every segment of the economy to find ways to adjust. The adoption by corporate America to work-from-home models helped keep a lot of people working, and one of the most intriguing success stories that I think will continue to be told for years to come about the pandemic is the way many businesses were able to not only survive during this difficult period, but even to thrive in unexpected ways that changed the way executives and managers think about the day-to-day details of running their business. I think one of the long-term effects will be a greater reliance than ever on remote work. It is true that a lot of businesses who were forced to rely on work-from-home models during the pandemic have begun to shift back to traditional in-office operations; but even in these cases, many analysts and economists predict that some form of remote work – perhaps, for example, employees will work so many days in-office per week and the rest at home – to remain in place on a permanent basis.
One of the business segments that the shift to remote work has really impacted in a negative way has been in Business Services; companies that provide services and solutions to corporate America for its regular (meaning, mostly traditional, in-office) business operations have been forced to weather major drawdowns in revenue and profitability simply because of the shift to remote work. If I’m right about the long-term, even permanent impact as those remote models are folded into permanent operational models, even on a modified basis, then it isn’t enough for the companies that provide workplace solutions to simply survive the COVID storm; they are also going to have find innovative new ways to adopt their own business models to serve that new reality as well.
One of the companies that I think offers an interesting case in point right now is Xerox Holdings Corporation (XRX). This is a company whose business is built around digital printing technology and workplace solutions. The last few earnings reports for this company have indicated big impacts on their business from the COVID-19 pandemic. After suspending forward guidance in 2020, management used earnings report at the start of this year to forecast modest revenue and cash flow improvement in 2021 as businesses begin reopening. They have also been ambitious about exploring merger and acquisition opportunities, despite failed attempts prior to the pandemic to merge, first with Fujifilm Holdings and then with HPQ. In the last couple of months, the company has closed multiple acquisitions that will allow them to extend their ability to provide services and solutions to the small and medium-size business (SMB) community, where the company sees increased spending on automation, digitization and security during the pandemic as an area of opportunity.
XRX’s stock saw a strong increase in price from last summer to mid-March of this year, rising from around $14.50 to a peak at around $27 at that point. From there, the stock has slowly been drifting lower, with bearish momentum increasing in the last couple of weeks as the stock has dropped from around $25 to its current level at around $23. Does that drop, along with the stock’s fundamental and valuation metrics, suggest that the stock could offer a useful value opportunity? Let’s find out.
Fundamental and Value Profile
Xerox Corporation is a provider of digital print technology and related solutions. The Company has capabilities in imaging and printing, data analytics, and the development of secure and automated solutions to help customers improve productivity. The Company’s primary offerings span three main areas: Managed Document Services, Workplace Solutions and Graphic Communications. Its Managed Document Services offerings help customers, ranging from small businesses to global enterprises, optimize their printing and related document workflow and business processes. Managed Document Services includes the document outsourcing business, as well as a set of communication and marketing solutions. The Company’s Workplace Solutions and Graphic Communications products and solutions support the work processes of its customers by providing them with printing and communications infrastructure. XRX’s current market cap is about $4.5 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased modestly, by about 4.76%, while sales decreased by a little more than -8%. In the last quarter, earnings declined by -62% while revenues were -11.4% lower. XRX’s operating profile before the pandemic set in was very healthy, but the extended effect of the last year and a half has narrowed their margins in a big way; over the last twelve months, Net Income was a little over 3.39% of Revenues, and weakened somewhat to 2.28%. The quarterly number does mark an improvement compared to June 2020 when Net Income was 1.84% of Revenues, and the beginning of 2020, when it was -0.11% – which means that the new quarterly number marks an improvement that I believe is a good indication that the company has managed to absorb the worst. Even so, this measurement remains a risk element that bears monitoring in the quarters ahead.
Free Cash Flow: XRX’s free cash flow is healthy despite its sustained decline over the past year, at about $424 million over the last twelve months. That number did drop from a little more than $674 million two quarters ago, and $775 million in June of 2020; but given the severity of the impact the pandemic has had, the turn isn’t surprising. The current Free Cash Flow number still translates to a useful Free Cash Flow Yield of 9.43%. It is also worth noting that XRX’s Free Cash Flow was $0 in June of 2018, with the company showing consistent improvement in this critical metric from that point until 2020. That acts as an interesting counterpoint to the company’s Net Income story, however the decline does still bear watching in quarters ahead to determine if Free Cash Flow deteriorates further, or follows the Net Income pattern to start moving back higher.
Debt to Equity: XRX has a debt/equity ratio of .68. That’s generally considered as a conservative number that reflects management’s approach to debt management. Since the beginning of 2018, the company’s long-term debt has decreased from a little more than $5.2 billion to its current level of $3.6 billion. Their balance sheet also shows almost $2.4 billion in cash and liquid assets, which means that servicing their debt isn’t a problem, and for now provides an important buffer, even if Net Income and Free Cash Flow remain challenged. It is worth mentioning that over the last year, long-term debt increased from $2.2 billion – meaning that the company took on about $1.8 billion in new, long-term debt to help weather the challenges of the pandemic.
Dividend: XRX pays a dividend of $1.00 per share, which translates to an annual yield of 4.21% at the stock’s current price. As things stand now, the dividend appears stable; it could also provide signals of fundamental weakness or strength, depending on whether management chooses to leave it as is, or as some companies have been forced to do in the last year, decides to reduce or even eliminate it to save cash.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to worth with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term target at about $14.67 per share, which suggests the stock is significantly overvalued right now, by about -37%. It also puts the stock’s useful bargain price a little below $12.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The diagonal red line traces the stock’s upward trend from its low at around $14.50 in July of last year to the stock’s high point, reached in in early March of this year at around $27. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. From that peak, the stock has retraced back find consistent support in the $23 price area, a little above the 38.2% retracement line. A drop below $22 where the 38.2% retracement sits should see downside to about $20, below the 50% retracement line and consistent with pivot activity seen in January of this year and October of last year. Immediate resistance is at $25, with the stock currently near support in the $23 price area. A pivot off of support has about $2 of room to resistance, with next resistance at around $27 based on the stock’s 52-week high in March.
Near-term Keys: XRX’ value proposition has eroded significantly over the last few months, when the stock’s Fair Value target was in the mid-$20 range. The relatively fragile state of their operating profile right now, along with some deterioration in Free Cash Flow also represent risk elements that make it hard to make a long-term argument for XRX at this point. That means that the best probabilities for success with this stock lies in short-term trades; you could use a bounce off of support at around $23 as an opportunity to buy the stock or work with call options, using the stock’s recent peak at around $25 as a useful, quick target, and $27 achievable if bullish momentum picks up. A drop below $22 could be a signal to consider shorting the stock or buying put options, using $20 as a quick profit target on a bearish trade.