Xerox (XRX-N)

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. 
Unlock Premium - Try 5i Free

Doesn't know the company well. There's support in the mid/low-$20's. $22-32 is the range. So you can buy and sell within that channel.

It is in play at present. There is a new CEO coming in. He is holding the stock because thinks there is more upside. We will know more on this transaction in the next few months.

(A Top Pick May 16, 2017, Down 0.4%) Earlier this year, they announced they would merge with Fuji Xerox, so Xerox will cease to exist later this year. Investors will get $9.80 dividend and own 49% of the new Fuji Xerox. This merger makes a lot of sense for them and good for shareholders. Though paper hasn't gone away, Xerox is now a tech company involved in document storage for large businesses. Photocopies are slowly declining, though colour copying is a boom for Xerox, given colour's high margins in colour cartridges. Xerox had trouble growing unlike Fuji Xerox.

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.

He likes the Tech sector. This company is a turnaround situation. They’ve missed a number of quarters of earnings and guidance. There is a lot of hope that they can get things turned around, but it is a little bit of a challenged story. You need to give it a little more time. The risk outweighs the return.

An amazing company. They recently spun off Conduint, their business process outsourcing business. The new management team is merging the old Xerox document management business with high technology. There has been a slew of new products out, aimed at the largest global companies to the small and midsized businesses. This has always been a big free cash flow generator. It is totally ignored by the street, which is why it is trading for less than 9X earnings. Dividend yield of 3.5%. (Analysts’ price target is $8.25.)