Over the last year, 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 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 once vaccinations have been widely distributed and administered enough to reach “herd immunity,” a lot of businesses currently relying on work-from-home models will begin to shift back to traditional in-office operations; but even in these cases, I won’t be surprised to see elements of remote work remain in place on a permanent basis.
One of the business segments that has been, and continues to be dramatically challenged throughout the last year 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 impact on those remote models being 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. More recently, management has expressed its confidence in the strategy that got them through the past year and in their prospects moving forward. They have also communicated an intention to explore merger and acquisition opportunities, despite failed attempts prior to the pandemic to merge, first with Fujifilm Holdings and then with HPQ. The stock had held through the spring and summer months in a narrow trading range below $20, but beginning in August of last year began to pick some bullish momentum to drive to a new peak in March at around $27. The stock has dropped from that high and appears to have settled into a consolidation range between $23 and $25. Despite the pandemic’s impact over the last few months, the company’s balance sheet has held up pretty well, suggesting that the company is, in fact, well-positioned to ride through the economic turmoil of current conditions. The open question, of course is whether business activity will return to previous levels, or will some of the shifts of the past year force XRX to adapt to a new operating reality. What does that mean for the stock’s value proposition and long-term prospects? 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 $4.7 billion.
Earnings and Sales Growth: Over the last twelve months, earnings improved by about 4.75%, while sales decreased by -8.06%. In the last quarter, earnings declined by about -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 has narrowed their figures in a big way. Over the last twelve months, Net Income was a little over 3.39% of Revenues, and narrowed somewhat to 2.28%. Despite the decline, 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% – the net improvement is something that I take as 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 somewhat from about $474 million in the quarter prior, and $674 million and $775 million in the quarters prior to that; 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 an attractive Free Cash Flow Yield of 8.97%. 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 pandemic-driven decline also bears watching in quarters ahead.
Debt to Equity: XRX has a debt/equity ratio of .68. 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 $3.6 billion. Their balance sheet also shows more than $2.6 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.
Dividend: XRX pays a dividend of $1.00 per share, which translates to an annual yield of 4.12% 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 $21 per share. At the stock’s current price, that means XRX is overvalued, by about -14%. An interesting counterpoint is the fact that stock’s Book Value is $27.85 per share – which is a little more than 13.5% above the stock’s current price.
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 a low at around $14 to its March peak at around $27. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. From that high, the stock dropped back to find support in late March at around $23.50. Since then it has settled into a narrow range between that support level and immediate resistance at around $25. A break above $25 should see the stock test the 52-week high at around $27, with additional short-term upside to about $29 if bullish momentum increases. A drop below $23.50 should find next support at around $22 where the 38.2% retracement line sits, with additional downside to around $20.50 at the 50% retracement line if bearish momentum accelerates.
Near-term Keys: XRX’ value proposition isn’t as useful in the current market environment as it has been; however management’s ability to steer the company through an incredibly difficult year is impressive, and is reflected by its the overall core strength in its balance sheet. The fundamental profile and value proposition would both be strengthened by continued improvement in Net Income on a quarterly basis, with a stabilization in Free Cash Flow, cash, and long-term debt levels to confirm that the past year’s challenges are really a simple reflection of a unique moment in time for the market. If you prefer to work with short-term trading strategies, you could use a break above $25 as a signal to buy the stock or work with call options, with a near-term price target at around $27. If the stock drops below $23.50, you can consider shorting the stock or buying put options, using $22 as a quick-hit profit target on a bearish trade.