For value-focused investors, stocks priced below their intrinsic value are always a lure. One such stock that has caught the eye of many is Xerox Holdings Corp (XRX, Financial). Despite its current price of $12.34 and a day's loss of 8.46%, the stock's GF Value stands at a promising $23.07. However, the question remains: is Xerox Holdings a hidden value trap?
Understanding the GF Value
The GF Value represents the intrinsic value of a stock, derived from GuruFocus's exclusive method. It incorporates historical multiples, an adjustment factor based on past returns and growth, and future business performance estimates. The GF Value Line on our summary page provides an overview of the fair value at which the stock should ideally trade. If the stock price significantly deviates from the GF Value Line, it may indicate overvaluation or undervaluation, influencing future returns.
Unveiling the Risks
Despite Xerox Holdings's seemingly attractive valuation, certain risk factors cannot be overlooked. These risks are evident in its low Altman Z-score of 1.52, suggesting potential financial distress. This complexity underlines the importance of thorough due diligence before making an investment decision.
Decoding the Altman Z-Score
The Altman Z-score is a financial model invented by Professor Edward I. Altman in 1968. It predicts the probability of a company entering bankruptcy within two years by combining five different financial ratios. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
A Closer Look at Xerox Holdings
Xerox Holdings Corp is an original equipment manufacturing and software company, deriving 60% of its revenue from the U.S. and 40% from international markets. The company is an OEM of multifunction printers, focusing on large enterprise markets. Despite its diverse operations, Xerox Holdings's stock price is significantly below its GF Value, raising the question of whether it is a value trap.
Xerox Holdings's Low Altman Z-Score: Unraveling the Key Drivers
An examination of Xerox Holdings's Altman Z-score reveals potential financial distress. The EBIT to Total Assets ratio, a measure of a company's operational effectiveness, has been on a declining trend (2021: 0.03; 2022: -0.05; 2023: -0.02). This suggests that Xerox Holdings might not be utilizing its assets efficiently to generate operational profits, negatively impacting its Z-score.
Concluding Thoughts
Despite its seemingly attractive valuation, Xerox Holdings Corp (XRX, Financial) may be a potential value trap due to its declining EBIT to Total Assets ratio and low Altman Z-score. These indicators suggest possible financial distress, emphasizing the need for careful analysis before making an investment decision. GuruFocus Premium members can find stocks with high Altman Z-Score using the Walter Schloss Screen .
This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
