Xerox Corporation (XRX, Financial) is a $9.26 billion market cap company that is a media and entertainment conglomerate with diversified global operations in theme parks, filmed entertainment, television broadcasting and consumer products.
Xerox operates in three segments: document technology, business services and other. Some months ago, the company announced its plan to split into two companies. The first one comprising the document technology corporations and the other comprising the business process outsourcing segment. The deal will generate about $2.4 billion in savings over the next three years in a strategic transformation program. The deal will be finished by the end of the year.
The stock has declined sharply by 14% on a year-to-date basis. One reason for this movement is the impact of higher costs due to the transaction mentioned above.
Looking at first quarter performance, we found a complicated trimester. Revenue declined about 4% when compared with the same period of the previous year. The document technology business experienced a 10% decline, equipment revenue declines in emerging markets while services revenue grew 1% offsetting the previous declines and being the key driver for the firm's growth. However, the company operates in a competitive segment of the IT services market while contracts with governments are sticky. The business should take action because otherwise the situation could get worse as offshore competitors constitute a significant risk. Competition would make a more price-competitive scenario. Furthermore, we see that companies are using computers, tablets or phones to display content rather than printing. Another fact is that they are increasing the outsourcing of printing needs.
Operating margin has been in a five-year decline. The average rate of decline per year is 9.2%, but management expects improvements in the next quarters, principally for the effects of transactional currency and one-time restructuring costs.
On the other hand, Xerox is less reliant on selling new products. Moreover, the printer business should contribute to high operating margins, and the managed print services segment of the printing market is growing in volume. With the aim of growth, Xerox is looking for acquisitions, while returning cash flow to shareholders. For example, the acquisition of Global Imaging Solutions has expanded the presence in the managed print services market.
Turning our attention to hedge funds, three investors  initiated new positions in the stock in the first quarter. Joel Greenblatt (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), and David Dreman (Trades, Portfolio) bought 3,959,756 shares, 642,599 shares and 34,646 shares while Carl Icahn (Trades, Portfolio) upped his stake by 7% to 92,377,043 shares.
Final comment
Xerox is a great player in the document technology segment due to its scale and through its technological offerings. Although the print market is large, it is true that it is a mature market that is in decline. When a stock price drops a lot, it could be a good entry point. But unfortunately, this is not the case. However, over time, the firm's positioning should be better, and investors should wait until a more robust stock market performance.
Disclosure: Omar Venerio holds no position in any stocks mentioned.
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