An Expected Growth Outside the U.S.

In this article, let's take a look at Xerox Corporation (XRX, Financial), a $15.49 billion market cap company, which is a media and entertainment conglomerate that has diversified global operations in theme parks, filmed entertainment, television broadcasting and consumer products.

Eurozone

Xerox is a leading service provider for back-office business processes and health-care solutions. Major players are Accenture (ACN, Financial), Computer Sciences (CSC, Financial), and the technology consulting arms of International Business Machines (IBM, Financial) and Hewlett-Packard (HPQ, Financial).

The company operates in three segments: document technology (35% of sales), business services (55%), and other (10%). The business services segment will be the key for Xerox, in which the firm expects about two-thirds of sales by 2017.

Operating in more than 160 countries, the firm derived about 70% of revenues in 2013 from the U.S., 21% from Europe and 11% from other areas. We believe Xerox has plenty of room to grow in countries in Europe as well as emerging markets. Further, we believe Xerox will continue growing through acquisitions.

Acquisition

A strategic move in the competitive industry was the acquisition of Global Imaging Solutions that expanded its footprint in the managed print services market, principally for small and midsize businesses.

Revenues, Margins and Profitability

Looking at profitability, revenues declined by 9.63% while earnings per share slightly increased in the most recent quarter compared to the same quarter a year ago ($0.26 vs $0.25). During the past fiscal year, the company's earnings per share of $0.93 remained unchanged from the prior years. This year, Wall Street expects an improvement in earnings ($1.04 versus $0.93).

The gross profit margin is considered high, at 38.19%; and it has increased from the same quarter the previous year. The net margin s ranked higher than 73% of the 2,091Â companies in the Information Technology Services industry and is currently at 4.71%.

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

The company has a current ROE of 8.8% which is higher than the industry median and the one exhibit by Computer Sciences. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Western Union (WU, Financial), and Automatic Data Processing (ADP, Financial) could be the options.

It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 15.3x, trading at a discount compared to an average of 56.9x for the industry. To use another metric, its price-to-book ratio of 1.3x indicates a premium versus the industry average of 3.46x while the price-to-sales ratio of 0.8x is above the industry average of 2.55x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $16.622, which represents a 10.7% compound annual growth rate (CAGR).

The stock is up 30.67% over the past year, a rise that has exceeded that of the S&P 500 Index.

Final comment

As outlined in the article, Xerox made various acquisitions as the one we mentioned before. Further, it has entered into promising regions outside the U.S. that should help revenue growth when the Eurozone recovers.

The PE relative valuation and the return on equity that exceeds the industry average and make me feel bullish on this stock.

Pioneer Investments (Trades, Portfolio) added this stock to their portfolios in the last quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned