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Xerox Embarked on a Series of Acquisitions

Victor Selva

Victor Selva

9 followers

Xerox Corporation (XRX), with a market capitalization of $13.11 billion, is among the largest companies in the global document markets. It is a provider of business process and document management. The company is a Business Process Outsourcing (BPO) company engaged in managing transaction processes.

In this article, let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment.

Successful Acquisitions

In February 2010, the company acquired Affiliated Computer Services (ACS) for approximately $6.4 billion in stock and cash. Last year, Xerox acquired WaterWare Internet Services with a view to upgrade its DocuShare enterprise content management (ECM) platform. WaterWare’s services include Web application and software development, integration and customization. It also purchased the U.K.-based Concept Group, increasing its presence in the UK market while working in parallel with other distribution channels in the region.

Moreover, Xerox’s acquisition of Lateral Data adds significantly to the range of solutions and entered into a definitive agreement to purchase UK-based WDS, a firm that provides technical support, knowledge management and related consulting to the world’s largest wireless telecommunication brands.

Other notable acquisition was the U.S.-based digital education provider LearnSomething Inc. in second quarter 2013, adding a web-based learning platform to Xerox’s offerings for the pharmaceutical and consumer goods industries.

Recently, the firm announced an agreement to acquire German-based Invoco Holding GmbH, expanding its European customer care services.

Analyst Recommendation

The firm is currently Zacks Rank # 3–Hold, and it also has a longer-term recommendation of “Neutral.” A Hold rating indicates that the stock, over the next one to three months, will perform at an annualized rate of 10.56%, very similar to the S&P 500. For investors looking for a better Zacks Rank, Pitney Bowes Inc. (PBI) is the option.

P/E, Earnings and ROE

In terms of valuation, the stock sells at a trailing P/E of 10.15x, trading at a discount compared to the mean industry. To use another metrics, its price-to-book ratio of 1.14x and the price-to-sales ratio of 0.65x are below their industry averages. All these metrics indicate that the stock is relatively undervalued relative to its peers.

Earnings per share (EPS) decreased by a penny in the most recent quarter compared to the same quarter a year ago, to $0.25 per share for Q4 of 2013. We include in the next graph the stock price because EPS often lead the stock price movement. As we can appreciate in the chart, the price performance makes the stock appealing with an upward trend over the last five years. The stock's share price has increased by 27.75% in the last year, exceeding the performance of the S&P.

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Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has decreased when compared to the same quarter one year prior. Let´s compare the current ratio with the peer group in the next table:

Ticker

Company Name

ROE (%)

XRX

Xerox

9.42

PBI

Pitney Bowes

75.8

RICOY

Ricoh, Ltd.

3.62

KNCAY

Konica Minolta Inc

3.25

CAJ

Canon, Inc.

8.64

As we can see, the firm has a higher ROE than it peers: Ricoh Ltd. (RICOY), Konica Minolta Inc. (KNCAY), Canon Inc. (CAJ); but is lower than the one registered by Pitney Bowes (PBI).

Final Comment

The company seeks to develop its outsourcing services business, as well as expanding its offerings through inorganic measures and adding more clients to its portfolio. Xerox’s strategy to revenue opportunities in Europe through acquisitions will also help the company in the near future.

I would recommend investors to add Xerox to their long term portfolios. Hedge fund gurus have also been active in the company in fourth quarter 2013. Gurus like Ray Dalio (Trades, Portfolio), David Dreman (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio) have taken long positions in it.

Disclosure: Victor Selva holds no position in any stocks mentioned.


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