Stock price when the opinion was issued
XRX has really struggled, with the stock down 43% this year. It is very cheap at 6X earnings, but is likely a value trap. Debt is very high, at about 6X cash flow. Sales are in decline, and are about half the level they were a decade ago. It is still profitable, however. EPS is half the level of 2016. The dividend payout ratio is only about 30%. The dividend was cut in 2017. Its small size and debt adds a lot of risk here. Market cap is only $1.3B, down from near $20B decades ago. It is expected to grow in the 2% to 3% range over the next couple of years. We would not consider the dividend to be safe, though with rates decline its debt burden becomes a bit less onerous. Still, not our type of stock and we would not suggest it.
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How do you analyse value when there is so much debt? He doesn’t like buying companies with too much debt. With this company, and a number of other companies like it, you have to separate the debt. There are 2 kinds of debt in this. A large chunk of it is related to financing customers who are buying their products. Like many, many companies, a large part of the debt is profitable debt where they make a spread when selling equipment. He calls this the financing debt, which is a profitable debt for them. Xerox is an investment company and their real debt is not actually that great, which is why it has an investment grade balance sheet. This is why you have to dig behind the numbers and look at the notes in the financial statements. He likes this stock. They are back to growth mode again, earnings have started to grow and free cash flow is growing. Companies have found they need document management, and even on the printing side the move to colour printing means they are making a ton of money on expensive ink cartridges.