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, but even to thrive in unexpected ways that changed the way managers think about the day-to-day details of running their business. One of the long-term effects that seems to be playing out as the virus proves to be tougher to beat this year than many expected is a continued reliance on remote work. This is a trend that appears more and more to be set to persist as a new, permanent part of whatever “normal” business operations will be in the future.
One of the business segments that has really suffered 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 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 has historically been built around digital printing technology and workplace solutions. Earnings reports for most of the past year and a half have indicated big impacts on their business from the COVID-19 pandemic. The stock pushed from a low around $17 in November 2020 to a high by February at around $27, but since then faded back into a consolidation range between $23 and $24.50. 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 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 forced operational shifts of the past year and a half will 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 $4.2 billion.
Earnings and Sales Growth: Over the last twelve months, earnings improved by about 213.33%, while sales improved 22.39%. In the last quarter, earnings improved by 113.64% while revenues were 4.85% higher. XRX’s operating profile before the pandemic set in was very healthy, but the extended effect of the last year has narrowed their figures; over the last twelve months, Net Income was a little over 4.13% of Revenues, and strengthened somewhat to 5.08%. Those numbers do mark an improvement earlier this year, which means that the new quarterly number can be taken as a good indication that the company has managed to absorb the worst. It isn’t entirely out of the woods, but the progress is encouraging.
Free Cash Flow: XRX’s free cash flow is healthy, at about $757 million over the last twelve months. That number increased from $424 in the last quarter, and $674 a year ago; given the severity of the impact the pandemic has had, the improvement is a good confirmation of the strength reflected by the increasing Net Income metric I just mentioned. The current Free Cash Flow number also translates to an attractive Free Cash Flow Yield of 16.5%. 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 from that point until 2020.
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 $4.2 billion. Their balance sheet also shows more than $2.1 billion in cash and liquid assets, which means that servicing their debt isn’t a problem, and for now provides an important buffer. It is worth mentioning that over the last year, long-term debt increased from $2.2 billion – meaning that the company has taken on about $2 billion in new, long-term debt over that time.
Dividend: XRX pays a dividend of $1.00 per share, which translates to an annual yield of 4.18% 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 $25 per share. The stock is only about 6% below that level now, meaning that the stock is only somewhat undervalued as things stand now. An interesting counterpoint is the fact that stock’s Book Value is $29.67 per share – which is almost 25% 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 plunge from its low at around $17 in November of 2020 its peak, reached in February 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 dropped in March to find support at around $23 – a level that has provided a consistent basis for support for the last five months. Immediate resistance is around $24.50, at the stop of that range. A drop below $23 should find next support around the 50% retracement line at $22, while a push above $24.50 would find next resistance at around $25.50; however an increase of bullish momentum should give the stock room to test its 52-week high at around $27.
Near-term Keys: XRX’ value proposition, based on my preferred combination of metrics 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. I do think the stock’s steadily increasing Book Value offers an intriguing counterpoint to my preferred metric combination, and could be a good reason to take XRX seriously as a value-based investment at its current price. If you prefer to work with short-term trading strategies, you could use a break above $24.50 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, you can consider shorting the stock or buying put options, but keep in mind the stock will likely have limited downside with next support expected at $22.