Ray Dalio (Trades, Portfolio) is the founder of Bridgewater Associates – one of the world's largest hedge funds with $165 billion in assets under management. Last quarter, he initiated a position in Xerox (XRX, Financial), buying 311,388 shares.
Xerox is the world's leading provider of business process and document management solutions. The company provides services, technology and expertise to enable its customers – from small businesses to large global enterprises – to focus on their core business and operate more effectively. The company's main business areas are Business Process Outsourcing; Document Technology and Document Outsourcing; and Information Technology Outsourcing.
According to sell side analysts, the company is expected to post an EPS of $0.98 in the current year and $1.08 next year. Its top line is expected to decline 5% in the current year. The main headwind for Xerox in the current year is adverse currency movements. The company's turnaround and transformation to a services company continues to gain traction. Citigroup (C, Financial) recently upgraded the stock from Neutral to Buy with a price target of $15. According to Citi analysts Jim Suva, Joe Yoo and Michael Cadiz,
"While currency and pension expenses are near term headwinds, we applaud Xerox's efforts to continue their transformation towards a Services company and expect multiple expansion as the company executes on their business transformation initiatives towards margin expansion in their services segment. Moreover the company has divested the IT Outsourcing and has allocated close to $900 million in acquisitions which should generate incremental services revenue growth which is not currently modeled into our estimates. Shareholder return policies and free cash flow yield are very attractive."
The company has returned more than 50% of free cash flow to shareholders over the last four years and plans to do the same this year by repurchasing up to $1 billion in shares and returning approximately $300 million to shareholders in dividends. The pending divestiture of IT Outsourcing business will further improve its cash profile, and the company will use excess cash for buybacks as well as to grow its business through acquisitions.
Xerox is trading at a PE of 11.71 and has a dividend yield of 2.50%. According to Gurufocus' DCF calculator, the stock has a margin of safety of 7%.
The company's turnaround is gaining traction and analysts are bullish on the company. Out of 11 analysts covering the company six have buy ratings while five have hold ratings. I believe the stock is a good buy at current levels.
