XRX is up 30% in the last two months – could it go even higher?

For the past year and a half, the Technology sector has been one of the most volatile segments of the economy to try to follow, as tariffs and trade tensions have rocked stocks in practically every industry within the sector to some extent or another. Despite that volatility, a number of those stocks have performed quite well year to date, with momentum picking up even more since the beginning of the fourth quarter. The past week has tempered trade enthusiasm a bit, but even so the market seems to operating on the assumption that a trade deal between the U.S. and China is more likely to be reached, and a looming December 15 deadline set by the Trump administration to impose a new set of tariffs to be delayed at the least.

Altogether, trade and an accommodative Fed attitude toward interest policy seem to be giving the market reason to hope for better things in the near future. If continued progress on trade can be made, it’s reasonable to suggest that Technology stocks in general should benefit; most have recently been including conversations about trade in their corporate earnings reports and its negative impact on their results, and so any kind of easing, or even (in the best-case, “blue sky” scenario) elimination of existing tariffs should help tech companies regain some of the ground that the trade war has cost them. That would give investors even more reason to extend a bull market that is already the longest in recorded history.

While it’s been at least a generation since Xerox Corporation (XRX) could claim a spot as a power player in the Tech world, they’ve never lost their relevance. Even now they continue to not merely survive, but to succeed and prosper by sticking to what they do best. That’s part of the reason the stock is up more than 85% since the beginning of 2019. A proposed merger between XRX and HPQ in November helped pushed the stock to a new multi-year higher a little above $39.

Does the hope of continued progress on the trade front, with the prospect of a major acquisition on the horizon mean that XRX could keep the bullish momentum going? The company has some very interesting fundamental strengths working in its favor, and a value proposition that offers an interesting, if debatable argument. Let’s look at the numbers so you can decide for yourself.

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 $7.9 billion.

Earnings and Sales Growth: Over the last twelve months, earnings increased more than 27%, while sales decreased by -6.5%. In the last quarter, earnings improved by 9.09% while revenues declined a little under -4%. XRX operates with an adequate, but strengthening margin profile; Net Income versus Revenues over the past year was 7.28%, but increased in the last quarter to 10%.

Free Cash Flow: XRX’s free cash flow is healthy, at a little more than $1.2 billion. That translates to an attractive Free Cash Flow Yield of about 14.5%. 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 in every quarter from that point.

Debt to Equity: XRX has a debt/equity ratio of .66. That’s generally 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 $3.2 billion. Their balance sheet also shows $922 million in cash and liquid assets.

Dividend: XRX pays a dividend of $1.00 per share, which translates to an annual yield of 2.72% at the stock’s current price.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for XRX is $21.75, and which translates to a Price/Book ratio of 1.69 at the stock’s current price. The stock’s historical average Price/Book ratio is 1.14, which means the stock is overvalue, by almost -33%. Given the generally positive, and improving fundamentals I just outlined, however, I’m a little more inclined to lean on XRX’s Price/Cash Flow ratio, which is currently about 26% below its historical average. That puts the stock’s long-term target price at around $46 per share.

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 the end of 2018 to its peak at about $39.50 in mid-November. It also provides the baseline used to calculate the Fibonacci retracement lines shown on the right side of the chart. The stock is about -5% below that high, with current momentum clearly on the bearish side. Immediate support is around $36 based on the stock’s July peak; if it drops below that point, it could drop to about $31.50, which is where the 38.2% retracement line rests. A push above resistance at $39.50 would give the stock room to push to highs in the mid-$40 range that the stock hasn’t seen since late 2004.

Near-term Keys: XRX is a stock with a solid fundamental profile, and what I think is a very interesting value proposition. That could make the stock a useful long-term value position – assuming you are willing to accept that the stock could see near-term downside pretty easily if broader, bearish market pressures come back into play. If you are an aggressive, short-term trader, there could be an interesting bullish opportunity if the stock can regain its bullish momentum and stage a break above $39.50; that could be a good signal to buy the stock or to work with call options. If you prefer to work the bearish side, the short-term probabilities are quite a bit stronger; a drop below $36 could be an excellent signal to short the stock or consider working with put options, with an eye on $31 as potential target price for a bearish trade.