In this article, let's take a look at Xerox Corporation (XRX, Financial), a $15.44 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.
Business model
Xerox has changed its business model by diversifying into outsourcing services, with longer-term contracts. Xerox is a leading service provider for back-office business processes and health-care solutions.
The copiers and printers segment sales constitute about 40% of total ones and generate attractive returns for its high margins. A major risk for the company is that there is not much room to grow in the printing market because of the increased use of computers, tablets, and smartphones rather than print media.
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.
Apart from good long-term contracts with governments, Xerox can sell other back-office services. We are referring here to human resource functions, cloud services, and network outsourcing.
Europe & emerging markets
Although Xerox generates more than two-thirds of its sales in the U.S., it has opportunities to grow in countries in Europe and emerging markets. Further, we believe Xerox will continue growing through acquisitions.
Several acquisitions
A few years ago, Xerox acquired Affiliated Computer Services (ACS, Financial) for approximately $6.4 billion. Further, it acquired WaterWare Internet Services gaining web application and software development, integration and customization.
Other acquisition to highlight is the one of Concept Group, where Xerox gained presence in the U.K. market. To continue with, the acquisition of Lateral Data, U.K.-based WDS, LearnSomething, Inc. and the agreement to acquire German-based Invoco Holding GmbH, are all strategic moves in a competitive industry.
More recently, other notable acquisition was 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, revenue declined by 1.84% while earnings per share remained flat in the most recent quarter compared to the same quarter a year ago ($0.22 vs $0.23). During the past fiscal year, the company increased its bottom line. It earned $0.93 versus $0.88 in the prior year. This year, Wall Street expects an improvement in earnings ($1.11 versus $0.93).
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.
| Ticker | Company | ROE (%) |
| XRX | Xerox | 9.42 |
| WU | Western Union Co | 72.27 |
| CSC | Computer Sciences Corp | 17.22 |
| MA | MasterCard Inc | 41.64 |
| ADP | Automatic Data Processing | 22.73 |
| FIS | Fidelity National Information Services Inc | 7.49 |
| Â | Industry Median | 7.18 |
The company has a current ROE of 9.42% which is higher than the industry median. 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), Computer Sciences (CSC, Financial), MasterCard (MA, 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 14.8x, trading at a discount compared to an average of 24.2x for the industry. To use another metric, its price-to-book ratio of 1.32x indicates a premium versus the industry average of 1.87x while the price-to-sales ratio of 0.79x is above the industry average of 1.06x.
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 $17.594, which represents a11.9% compound annual growth rate (CAGR).
Final comment
As outlined in the article, Xerox is improving its margin while offering other products. In order to expand its business, the company made various acquisitions. Also, it has entered into promising regions outside the U.S.
The PE relative valuation and the return on equity that exceeds the industry average and make me feel bullish on this stock.
Hedge fund gurus like Joel Greenblatt (Trades, Portfolio) and David Dreman (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
