This Xerox spin-off has an enviable list of clients and operates in a rapidly-growing sector.
Conduent, Inc. (CNDT)
From The Turnaround Letter
Conduent, Inc. (CNDT) became a newly independent company at the end of last year following its spin-off from Xerox. Its business process technology services help organizations operate more efficiently and effectively.
About 44% of its $6.6 billion in revenues come from business clients, with public sector and healthcare clients each producing 26% of sales. The client base is diversified and includes 76 of the Fortune 100 companies. Most of its sales are generated in North America. With an 86% contract renewal rate, Conduent’s business is relatively stable.
Most of what is now Conduent joined Xerox in 2009 with the $6.4 billion acquisition of ACS. The deal was intended to produce faster revenue and profit growth through cross-selling: ACS brought considerable consulting and business process expertise while Xerox brought a large base of hardware customers. However, the newly combined company struggled to produce much growth. Xerox revenues fell well short of its pre-merger goals, and by 2016 were actually declining. The profit picture was equally unimpressive with earnings declines in 2015 and likely again in 2016.
It appears that Xerox tried to force-fit the cross -selling strategy at the expense of each segment’s underlying strengths. Different cultures and business models produced more problems. Under pressure from Carl Icahn and other investors to make changes, Xerox decided to reverse the 2009 ACS acquisition by spinning off Conduent.
Analysis: We like the spin-off. It provides two very appealing fundamental improvements: new leadership and more focus. Ashok Vemuri will head the company as CEO, bringing impressive capabilities. He joined Xerox in 2016 after building tech services firm IGATE Corporation and then selling it to consulting giant Capgemini. He also gained valuable experience with senior leadership roles at global IT consulting firm Infosys. His early experience as an investment banker provides a critical shareholder-value perspective.
Management will refocus the company exclusively on business process consulting. Initial efforts will emphasize stabilizing revenues, and then the company plans to grow by providing new services and pursuing higher-margin opportunities. Early priorities include tightening the organization and business model, which likely became misaligned under the former Xerox structure. Management is targeting $700 million of savings over the next three years. The company also wants to modernize its technology platform. These programs, along with fixing problems in the student loan and healthcare segments, should help boost margins and reduce their volatility.
Carl Icahn controls three of the eight board seats and owns a sizeable stake, which should keep pressure on the new management team to improve execution and results. Cash operating profits (EBITDA) are reasonably healthy at about 9.9% of revenues. The debt will be manageable at about $2.0 billion, which is partly offset by $224 million of cash. The overall valuation of 7x EV/EBITDA is attractive and a meaningful discount to its peer companies.
We think Conduent has a bright future. We recommend buying Conduent up to 20.
WSBI Editor’s Note: We just profiled Xerox, the company from which Conduent was spun off in our March issue of Wall Street’s Best Dividend Stocks. If you’re not already a subscriber you can subscribe here.
George Putnam III, The Turnaround Letter, www.turnaroundletter.com, 617-573-9550, February 2017