Icahn Capital just bought more of this technology company, bringing its stake to 14.5% of the outstanding shares. The stock has a current dividend yield of 4.37%, paid quarterly.
Xerox Holdings Corporation (XRX)
From Cabot Turnaround Letter
Xerox is a leading producer of printers and copiers. The company also has a sizeable managed print services business that helps customers efficiently and securely operate their printer networks, as well as provides repair and other services. In addition, Xerox sells a range of related supplies including paper and cartridges. Equipment sales represent about a quarter of total revenues, with the balance coming from post-sale revenues including a small contribution from its equipment leasing segment. About 35% of sales are produced outside of the Americas.
Founded in 1906, Xerox’ copiers drove decades of growth. Its Palo Alto Research Center was the first to develop the computer mouse, the graphical user interface, PDFs, and other now-commonplace desktop technologies. Xerox acquired ACS in 2010, then spun it out in 2016 as Conduent.
Xerox has suffered from a secular shift away from printing and copying as well as from this year’s pandemic-driven work-from-home trend. Weak demand led to its revenues declining 19%, and adjusted operating profits declining 50%, in the third quarter. Revenues from mid-range enterprise equipment, which produces 70% of total equipment sales and is a key driver of post-sale revenues, fell 15% in the quarter.
In addition to the weak demand outlook for equipment and services, investors worry about intense price competition. Printers, services and supplies are mostly commoditized in the lower and mid-tier size ranges, where substitution is common. Investors have pushed Xerox shares down 40% this year, even after the vaccine-driven bounce.
Investors underestimate the value of Xerox shares. What makes the shares valuable is not their growth prospects (there are none) but rather the company’s generous free cash flow and cash-heavy balance sheet. While Xerox is working to develop new technologies, including packaging printing and digital documentation management, these won’t offset the secular headwinds. We conservatively estimate that Xerox’ revenues will recover to about 75% of their former level, then resume their 3-5% decline path.
Even with weak revenues, Xerox produces considerable free cash flow. Despite the weak third quarter, Xerox produced $131 million in operating profits and $88 million in free cash flow. In a recovery scenario, the company could generate close to $600 million in annual free cash flow, representing nearly 15% of its current market cap. Xerox pays a generous dividend (yielding 4.6%) and is a frequent repurchaser of its shares, including as much as $300 million this year.
Helping to maintain its focus on cash flows is the relatively new CEO, John Visentin. He brings technology and private equity leadership experience to Xerox, and is driving a sizeable cost and efficiency program to streamline the company’s operations.
The company’s balance sheet is solid. It carries $3.3 billion in cash, more than offsetting its $2.1 billion in corporate debt. Its financing subsidiary that funds customer purchases and leases carries an additional $3 billion in debt, but this is a low-risk business that is well-capitalized.
Overall, this re-purchase, at much lower prices, and trading at a low 5.4x EV/EBITDA, holds considerable turnaround promise.
We recommend the purchase of Xerox shares with a 33 price target.
Bruce Kaser, Cabot Turnaround Letter, cabotwealth.com, 978-745-5532, November 25, 2020