As a Deep Value Investor it never ceases to amaze me how some investors can sell shares in the companies that I have clearly identified as “steal it” stocks. This tells me that those selling shares in such companies do zero or very little research at all prior to doing so, otherwise the last thing they would ever think of doing is sell. Recently Xerox (XRX, Financial) has experienced such a sell off in its shares and has been drifting lower. I think Xerox is one of the most misunderstood companies around, and this article should clearly demonstrate why I think anyone selling this stock at these levels is not only throwing the baby out with the bathwater, but is throwing the whole maternity ward out as well.
The following is an analysis of Xerox using my “Mycroft Research System” and for those of you new to my writings, here is an introduction to my system:
http://www.gurufocus.com/news/128672/analysis-of-the-new-york-times-nyt#129129
Xerox Corp. develops, manufactures, markets, finances and services a wide range of copiers, laser printers, and document publishing equipment. Equipment sales (mainly color and high-end black-and-white copiers/ printers and publishing systems) accounted for 33% of 2010 revenue; supplies and document-management outsourcing, 64%; and finance income, 3%.
So as you can see from the description above that only one third of Xerox’s business is equipment sales, though everyone still thinks of the company as just an equipment manufacturer. The truth is that they are converting their business model over to a document-management/supplies services business, similar to what IBM (IBM, Financial) did years ago, when they decided to concentrate on the services side. This resulted in IBM having their revenues and profits explode to the upside in the decade that followed. I see the same thing happening at Xerox over the next decade and believe the company will be a very successful fully fledged high margin services business.
Xerox has a long tradition of producing high quality products. I recently purchased a laser printer and a high end scanner from them. Both products I found were of impeccable quality and I don’t see the need to ever have to replace them anytime soon. The quality of those products reminds me of the same quality one would find in a Mercedes-Benz or BMW automobile.
Having determined that the quality of their products are second to none, I wanted then to see how the quality of their finances were as well, but not just over the last two or three years, but as far back as I could go.
The following are the key data points for Xerox, which I will use in this analysis:
As you can see from the table above that Xerox has been consistently profitable for 39 straight years and though they may have not been able to grow their owner earnings (OE) much in the last decade, they have never the less remained free cash flow positive. All great companies experience such periods of zero growth at least once in their history, just as Apple(AAPL, Financial) or IBM had some rough years a decade or so ago as management had trouble finding the right direction they wanted to take their companies in.
Since Apple and IBM already had a strong corporate culture already in place, a Steve Jobs or Louis Gerstner eventually showed up and guided their companies in the right direction. I believe that Xerox’s current management has made some great decisions over the last three years in deciding to convert the company into a document services firm and away from just being an equipment sales company. The new Xerox is definitely not the old Xerox that your father knew.
So since the story is positive, let’s now look at the numbers.
For 2012 Value Line (VALU) estimates that Xerox will pump out $1.80 a share in owner earnings. Thus if we take the current stock price of $10.03 and divide it by $1.80 we get a price to owner earnings of 5.57. Now if you look at the 60 year backtest I did on the DJIA from 1950-2009 http://www.mycroftresearch.com/60_Year_Backtest_of_DJIA.html you will notice that when you buy stocks selling for a price to owner earnings of 15 or less, that very positive things can happen.
As you can see from the chart below that Xerox has been a very solid performer on the OE front;
If you go back to the table at the beginning of this article, you will find that if you just add the Owner Earnings numbers from 2006-2012E together you will notice that Xerox has generated more in free cash flow in just those years alone then its total current market cap. To show you how incredible that is, Apple, the darling of the hour, only generated $74.62 in free cash flow per share during those same years and trades at a market capitalization of almost 5 times that number. So forget about the fact that Xerox has generated $61.89 a share in free cash flow over the last 40 years and that it is trading at 1/6th its COE and just concentrate on the last seven years only and you will find that you are still stealing it at $10.03.
Therefore we now have Xerox as a steal on a price to owner earnings basis and on a COE basis. Now all that’s left is to measure is investor sentiment and we do that by running my Statistical Indicator Analysis (SIA).
The current SIA for Xerox is $17.24, thus at $10.03 it is selling at 58% of our SIA and is classified as a “Steal It” stock on a SIA % scale.
Now that we have the three main ingredients to generate a final decision using my Mycroft Research System, let me now show you my systems final results for Xerox:
So there you have it, Xerox is selling at a 72% discount to my buy price and a 58% discount to my “steal it” price, which is one of the largest discounts I have ever found using my system.
Before closing here is a CapFlow chart of Xerox which will prove what a super low cost operator the company is, as it has averaged about 18% Cap Ex as a percentage of Cash Flow over the last ten years.
In conclusion my work has clearly shown that anyway you look at Xerox it is a deep value bargain in my opinion.
The following is an analysis of Xerox using my “Mycroft Research System” and for those of you new to my writings, here is an introduction to my system:
http://www.gurufocus.com/news/128672/analysis-of-the-new-york-times-nyt#129129
Xerox Corp. develops, manufactures, markets, finances and services a wide range of copiers, laser printers, and document publishing equipment. Equipment sales (mainly color and high-end black-and-white copiers/ printers and publishing systems) accounted for 33% of 2010 revenue; supplies and document-management outsourcing, 64%; and finance income, 3%.
So as you can see from the description above that only one third of Xerox’s business is equipment sales, though everyone still thinks of the company as just an equipment manufacturer. The truth is that they are converting their business model over to a document-management/supplies services business, similar to what IBM (IBM, Financial) did years ago, when they decided to concentrate on the services side. This resulted in IBM having their revenues and profits explode to the upside in the decade that followed. I see the same thing happening at Xerox over the next decade and believe the company will be a very successful fully fledged high margin services business.
Xerox has a long tradition of producing high quality products. I recently purchased a laser printer and a high end scanner from them. Both products I found were of impeccable quality and I don’t see the need to ever have to replace them anytime soon. The quality of those products reminds me of the same quality one would find in a Mercedes-Benz or BMW automobile.
Having determined that the quality of their products are second to none, I wanted then to see how the quality of their finances were as well, but not just over the last two or three years, but as far back as I could go.
The following are the key data points for Xerox, which I will use in this analysis:
As you can see from the table above that Xerox has been consistently profitable for 39 straight years and though they may have not been able to grow their owner earnings (OE) much in the last decade, they have never the less remained free cash flow positive. All great companies experience such periods of zero growth at least once in their history, just as Apple(AAPL, Financial) or IBM had some rough years a decade or so ago as management had trouble finding the right direction they wanted to take their companies in.
Since Apple and IBM already had a strong corporate culture already in place, a Steve Jobs or Louis Gerstner eventually showed up and guided their companies in the right direction. I believe that Xerox’s current management has made some great decisions over the last three years in deciding to convert the company into a document services firm and away from just being an equipment sales company. The new Xerox is definitely not the old Xerox that your father knew.
So since the story is positive, let’s now look at the numbers.
For 2012 Value Line (VALU) estimates that Xerox will pump out $1.80 a share in owner earnings. Thus if we take the current stock price of $10.03 and divide it by $1.80 we get a price to owner earnings of 5.57. Now if you look at the 60 year backtest I did on the DJIA from 1950-2009 http://www.mycroftresearch.com/60_Year_Backtest_of_DJIA.html you will notice that when you buy stocks selling for a price to owner earnings of 15 or less, that very positive things can happen.
As you can see from the chart below that Xerox has been a very solid performer on the OE front;
If you go back to the table at the beginning of this article, you will find that if you just add the Owner Earnings numbers from 2006-2012E together you will notice that Xerox has generated more in free cash flow in just those years alone then its total current market cap. To show you how incredible that is, Apple, the darling of the hour, only generated $74.62 in free cash flow per share during those same years and trades at a market capitalization of almost 5 times that number. So forget about the fact that Xerox has generated $61.89 a share in free cash flow over the last 40 years and that it is trading at 1/6th its COE and just concentrate on the last seven years only and you will find that you are still stealing it at $10.03.
Therefore we now have Xerox as a steal on a price to owner earnings basis and on a COE basis. Now all that’s left is to measure is investor sentiment and we do that by running my Statistical Indicator Analysis (SIA).
The current SIA for Xerox is $17.24, thus at $10.03 it is selling at 58% of our SIA and is classified as a “Steal It” stock on a SIA % scale.
Now that we have the three main ingredients to generate a final decision using my Mycroft Research System, let me now show you my systems final results for Xerox:
So there you have it, Xerox is selling at a 72% discount to my buy price and a 58% discount to my “steal it” price, which is one of the largest discounts I have ever found using my system.
Before closing here is a CapFlow chart of Xerox which will prove what a super low cost operator the company is, as it has averaged about 18% Cap Ex as a percentage of Cash Flow over the last ten years.
In conclusion my work has clearly shown that anyway you look at Xerox it is a deep value bargain in my opinion.
