Stock of the Week
NYSE Symbol: XRX
Industry: digital print technology and solutions
Price as of 6/26: $15.06
The major averages are pulling back to end the second quarter after a torrid rebound off the March lows. Year to date the Dow Jones is down 12%, the S&P 500 is down 7% while the Nasdaq Composite is up an amazing 8%. Tech remains the standout for the year with large caps like Apple, Microsoft, Facebook, Netflix and Amazon powering to new all-time highs distorting and masking the true weakness in the markets. While many tech stocks look expensive, plenty of stocks and sectors remain attractive for long term investors. This week we will highlight one of the best tech stocks from fifty years ago with a very attractive dividend yield. The featured stock of the week is Xerox. The 109-year-old company continues to change with the times to stay relevant. With the rise of COVID-19, Xerox switched gears to leverage its manufacturing capabilities and in-house materials expertise to produce approximately 140,000 gallons of hand sanitizers while also partnering with Vortran Medical Technology to speed up large-scale production of the GO2Vent ventilator for hospitals.
Xerox's core business of imaging and printing, data solutions and analytics has come under pressure as many companies reign in their capital spending budgets. Last quarter Xerox reported a small $5 million loss as sales declined 14% to $1.9 billion. Heading into 2020, Xerox was expected to generate adjusted profits of $3.70 a share on revenue of $8.63 billion. Xerox also started the year with the ambitious hostile bid to acquire larger rival, HP. The deal was championed by billionaire, Carl Icahn who owns a 10% stake in Xerox.
Following the first quarter results, Xerox dropped their hostile takeover of HP to focus on their key businesses. Xerox executives have cut non-essential expenses to preserve cash as demand remains weak in the second quarter. Management at Xerox expects to achieve gross savings of $450 million while still returning 50% of free cash flow to investors with their very generous dividend. Xerox is also optimistic that business will slowly return by year end.
Looking at current valuations, Xerox's stock remains cheap. The current market cap stands at just $3.2 billion. The stock is trading at the same price as it did during the financial crisis of 2008, the tech bubble and 9/11 attack back in 2001 and the recession from 1991. At current levels, Xerox's stock trades for just for just 0.5 times sales, 10 times reduced earnings and 6 times next year's reduced earnings. The stock also trades for 0.6 times book value of $25 a share. Typically, a stock that trades for such a reduced multiple is laden with a lot of debt. But subtracting cash from debt leaves Xerox with only $2 billion net debt with annual free cash flow of one billion dollars in more normal years.
Going forward, Xerox's fundamentals should eventually improve. Management has shored up the balance sheet to weather this pandemic. The decision to drop the bid for HP should ease investors' concerns about too much leverage, however, Carl Icahn will not stop trying to create shareholder value for himself and others. Investors with a long-term perspective could see good capital appreciation in the coming years with an annual dividend yield of 6.6% while they wait for the fundamentals to improve.