One of the big challenges for average investors like you and me is sifting through the mountains of information that comes from the market on a daily basis.
I think that may be the biggest reason that so many investors have been conditioned over the course of decades of market activity to rely on analyst estimates or broker recommendations. As both an analyst and an investor, I actually find the idea a little ironic, because predicting the future in any context is nothing more than pure guesswork, and any success comes by nothing but sheer luck – but we still keep trying to do it anyway. It’s one of the reasons that, a long time ago, I started studying the principles of value-based analysis.
My study led me to the writings of Benjamin Graham, who is widely credited as the father of fundamental analysis and well-known as the man who taught a young Warren Buffett the basic principles that still drive his investment philosophy today. One of the primary takeaways for me was the way that Mr. Graham didn’t use future estimates in his analysis. He preferred to boil his investment decision to a single, simple question: is the company’s book of business worth more than its stock price today? If the answer was yes, the stock was worth consideration as a long-term investment. The larger the difference between a company’s value and its actual stock price, the more compelling the argument became. Estimates about the future don’t figure into that question, or its answer, at all.
The question of how to determine the value of a company’s book of business has a lot of different possible answers. While Mr. Graham’s original data points for finding that number have become a bit dated, the basic principles he described nearly a hundred years ago still hold true, have become the foundation of the value-based system I use to identify my own investing opportunities, and are the core of the analysis I write about every day in this space.
Now to the stock I’m using to for today’s post. Xerox Holdings Corporation (XRX) is a company that I have followed for some time, and that I have used to pretty nice effect on a number of occasions over the last few years – even during 2020 and 2021, when the entire Business Services industry this company operates in struggled as practically all of corporate America shifted to remote workforce operations and the services that support them because of COVID-19. That working model is still in place for big portions of the business wold, however there is also a push for many companies to resume some form of in-office operations. For a business that largely relies on traditional, in-office operations, that means that XRX has focused extensively on cost controls to survive the worst, and most persistent pandemic-driven effects in order to survive. An uptick in office activity is one of the reasons the company reported two-thirds of its business is contracted for multiple years into the future, with a significant backlog that started to unwind by more than double in 2022 versus 2021 ago. These are elements that I think can be expected to continue driving revenue and profit growth in 2023.
XRX’s earnings reports for most of the past three years have indicated big impacts on their business that continue to be felt today. The extended effect remote work continues to have on the Business Services segment, along with the broad market’s bearish conditions last year, pushed XRX into a strong downward trend that finally found a bottom in October of last year at around $12. The stock has since picked up a lot of bullish momentum, driving to its most recent high at around $18 last month before fading and settling back at is current level a little below $17 per share. Is the stock beginning to reverse its long-term downward trend, and if it is, what does that mean for the stock value proposition right now? Let’s dive in.
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 $2.6 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by nearly 162% (not a typo), while sales were about 9.25% higher. In the last quarter, earnings increased even more dramatically, by more than 368% while revenues were about 10.85% higher. The turn to positive earnings growth in the last quarter is interesting, and may be confirmed by the company’s margin profile. Over the last twelve months, Net Income was -4.23% of Revenues, and strengthened in the last quarter to -6.23%. The positive difference is confirmation of a recovery pattern that began in the second half of 2022.
Free Cash Flow: XRX’s free cash flow is generally healthy, at about $189 million over the last twelve months, but it has declined over the past year, from $511 a year ago, with an increase from $116 million in the quarter prior. The decline isn’t surprising against the backdrop of the last three years. Along with improving Net Income, however I’m reading the quarterly improvement in Free Cash Flow as confirmation of the company’s overall financial strength. The current Free Cash Flow number also translates to a Free Cash Flow Yield of 7.29%.
Debt to Equity: XRX has a debt/equity ratio of .85. That’s a generally conservative number that reflects management’s careful 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 $2.8 billion (about even with its long-term debt level from a year ago). Their balance sheet also shows more than $1 billion in cash and liquid assets, which means that servicing their debt isn’t a problem, and adds an important, additional buffer to go along with the improving Free Cash Flow and Net Income metrics.
Dividend: XRX pays a dividend of $1.00 per share, which translates to an annual yield of 6% 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 I like to worth with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term target a little above $22 per share, suggesting that the stock is undervalued, with nearly 33% upside from its 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 downward trend from its 52-week high at around $23.50 a year ago to its October low at around $12. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock has moved into an intermediate-term upward trend from that low, and peaked in late January at around $18 to mark immediate resistance at that level. Current support is around $16, inline with the 38.2% retracement line. A push above $18 will find next resistance at around $19, however an increase in buying activity at that level should give the stock some additional room to push to around $21 per share. A drop below $16 should see limited downside, with next support expected at around $15, and $14 below that if selling activity increases.
Near-term Keys: XRX’s value proposition is very interesting at the stock’s current price, with a strengthening fundamental profile making the stock look more and more like a useful bargain right now. If you prefer to use momentum-driven trading strategies, you could use a push above $19 as a signal to think about buying the stock or working with call options, with $21 providing a practical, quick-hit profit target for a bullish trade. The stock appears to have limited downside right now, which makes a short-term bearish bet by shorting the stock or buying put options a very low-probability prospect.