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David Chulak
David Chulak
Articles (77) 

XEROX - Ready to Reproduce Money?

February 07, 2012 | About:

The Xerox (NYSE:XRX) name is one of the best-known brand names in the world. The company, founded in 1906, has been doing business for over a century. The Xerox Corporation has seen good times and bad times through those years and had to alter its course or business model recently, but it appears that the company may be coming out of a long drought and worthy of attention from more investors.

Whether you are a value investor or a contrarian, there are many things to attract you to this stock, including a depressed stock value of just under $8. The stock price is down about one third in the last 12 months and over half since its 2008 high of $16.43. It boasts the following metrics alongside its competitors:


The valuation is a little more difficult to calculate. The GuruFocus DCF calculator indicates an intrinsic value of around $16. My valuation techniques are made up of several and averaging them out, including price to EBIT, price to FCF, discounted book value, discounted earnings, DCF, etc. Ultimately, I determined the valuation closer to $13 with roughly a 40% margin of safety — still quite satisfactory.


The stock is currently held by the following investing gurus:


Xerox, is currently in 160 countries and has approximately 136,000 employees. It receives approximately 65% of its revenues directly from the U.S., 11% from Europe and the remainder from various other countries. While difficulties in the European economy may hurt Xerox in the short term, all companies that have a portion of their business in Europe will feel some impact. Xerox’s small revenue base should, in my opinion, be manageable. Further, the amount of free cash flow with this company indicates it can weather another economic storm, as it’s done for the last 106 years.

The company has two main business segments and one minor segment: Technology, Services and Other. Interestingly, the company is in the course of altering its business model by increasing the services sector. The services sector has recently become the main focus as shown in the diagram below. In 2010, Xerox acquired Affiliated Computer Services (ACS). While many have been critical of the acquisition, it has significantly increased the service capabilities of the company, allowing for the company to increase its margins over the lower margin technology sector.

There are several reasons for considering this company:

1. Metrics indicate an undervalued company with a price that has plenty of upside.

2. Successfully altering its business model to services over technology that should lead to much higher margins. The acquisition of Affiliated Computer Services should enhance the business for a long time.

3. Acquisition of Global Imaging Solutions has increased the amount of new clients.

4. 2.1 dividend yield, with a payout ratio of 16, allowing for plenty of dividend growth.

5. Lots of cash flow.

6. Improvement in the U.S. economy should strengthen the company in all sectors.

7. While Europe may continue to sink into a full recession, the limited amount of exposure to Europe, along with their free cash flow, should allow them to safely withstand the downturn.

8. Latest digital equipment improvements such as iGen4 are displacing older printing technologies

9. Small and medium businesses now have access to cloud computing which has been mostly

provided for only global-type companies.

This is not a recommendation to buy. Please do your due diligence in researching any stock.

Disclosure: I am long on Xerox

About the author:

David Chulak
David Chulak is a private investor that uses a value approach to investing in the styles of Graham & Dodd and Warren Buffet. Looks for that margin of safety in an effort to preserve capital and attempts to guard against short term market fluctuations by having clear rules laid down in advance for selling an equity. Likes to visit the company's where his investments are in order to understand the business better.

Rating: 3.7/5 (15 votes)


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