Xerox: More Outperformance In 2015

A) Introduction

Xerox (NYSE:XRX) is one of the most shareholder friendly companies in the market, evidenced by management's goal to return $1.3 billion - just under 10% of market cap - to shareholders through share buybacks and dividends. As we'll discuss in this article, we agree with company management in that Xerox represents a great investment at these prices.

The report will start with a breakdown of Xerox's valuation profile, followed by an analysis of price & profit growth, and concluding with some qualitative analysis and conclusions. We take a quantitative approach to investing, preferring to focus our analysis on metrics that have strong predictive ability. Thus, we tend to analyze academic papers and perform historical back tests on different metrics before including them in our analysis. We will provide links to the academic papers we draw inspiration from as we progress through our breakdown of the stock so readers can see for themselves what we base our conclusions on.

B) Valuation Breakdown

We'll start by analyzing Xerox's value profile. This is important to look at as "Value stocks (with low ratios of price to book value) have higher average returns than growth stocks (high price-to-book ratios)". Xerox's valuation profile is shown below:


On four of the five value metrics shown above, Xerox resides within the top 30% of the entire market. Xerox is unique in that its cash flow yield (Free cash flow/Price) of 9.2% (1/11.1) is actually higher than its earnings yield of 6.5%. This means the company actually generates more free cash flow than earnings. Free cash flow is a more indicative and practical measure of both operating performance and value, as it less easily manipulated than earnings. On a free cash flow basis, Xerox looks very undervalued compared to its peers with its price/free cash flow of 11.1 being much lower than the industry group (19), sector (67), and overall market (86) averages. While Xerox's dividend yield is below average at 1.8%, the company has announced $1 billion in share buybacks in 2015, leading to a relatively high "shareholder" yield. Xerox also sports an attractive sales yield (132%) and price/book (1.36) relative to the office electronics (45% & 2.69) and technology sector (23% & 5.08) averages. Overall, our model rates Xerox as "Strongly Undervalued" and we expect the stock to generate 9.77% of outperformance over the market in the next 12 months due to its relative undervaluation.

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Disclosure: The author has no positions in any stocks mentioned. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. ...

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