Trade of the Day: Xerox (XRX)

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Today, let’s look at Xerox Corp (XRX) — a company that is both a value play because it’s cheap, and a technical play because its price has been slammed to the bottom of its channel. It’s a very well-known name that has fallen on difficult times. But what a name.

Consider that we don’t simply search for answers on the internet, we Google things. We don’t grab for tissues when we’re about to sneeze, we reach for Kleenex. Similarly, there was a time when you didn’t copy documents, you Xeroxed them, and some of you may still use this phrase.

Xerox got its start back in 1906, when it was founded in Rochester, N.Y., as the Haloid Company. By 1965, the company had surpassed half a billion dollars in annual revenues. I remember the wonder of using one of its machines in my dad’s office when I was around 8 years old. It was expensive, but it was disruptive technology that shoved carbon paper and mimeographs into the sands of time.

The company was just getting started, however, as it would go on to launch new and revolutionary products every few years. First came the desktop copier, which could fit on an office desk, then color copiers, faster speeds, better quality copies and fax machines.

Xerox did for that generation what Apple Inc (AAPL) did for this one: fresh and innovative ideas, with a flair for changing the way we lived or conducted business. Indeed, some of Apple’s key early success with graphical user interface of its Lisa and later Mac products stemmed from research originally done by Xerox at its PARC labs in Silicon Valley, and then shelved. Xerox engineers are also credited with inventing the still-ubiquitous computer mouse, as well as “what you see is what you get” (WYSIWYG) word processing.

But that was a long time ago, and the company has had to reinvent itself on more than one occasion to remain relevant.

The best way to explain what the company does now is to look at its two current primary operating segments: technology and services.

The technology business unit is what Xerox was built on. What started off as simple black-and-white copiers has shifted throughout the years to network printers, digital storage solutions, and mobile and cloud printing systems. Within the company’s technology segment is the production print solutions products, such as on-demand continuous feed printing, printing work flow software, short-run book publishing and cross-media print campaigns.

In addition to the technology, Xerox is the largest business process outsourcing company in the world. With growth in the copier business waning, in 2010 the company acquired ACS, which tripled the size of its service business. Some of its current offerings include total company benefits outsourcing, IT solutions, payroll processing, treasury and cash management, and a whole host of other services.

It’s pretty clear that services are the future of Xerox, and it continues to invest heavily in this part of the company. It has contracts for outsourced back-office functions from customers all over the spectrum, including federal and local governments, state health care and transportation agencies.

According to analyst Peter Wahlstrom of Morningstar, Xerox’s strategy for the future is to take these customer accounts and layer on additional services — like human-resource functions, cloud services and network outsourcing — onto what are already pretty sticky relationships.

The shift to a focus on business services, which represents 57% of revenues, hasn’t been a smooth one. As a result, shares have paid the price; XRX is down over 30% for the year to date. But the valuation software that I use pegs its worth at $12.50 at minimum, which is about 30% higher than the current quote. With a forward price/earnings ratio (P/E) of just 9.3x, there’s certainly room for improved sentiment to push up the value.

Trade of the Day: Xerox Corp (XRX)

Xerox has increased its dividend annually the past three years, and has already authorized $1.3 billion in stock buybacks. Additionally, after the last quarter, the board approved a full review of the company’s business portfolio, which should give investors a bit of encouragement, since it could lead to some divestitures that will improve the bottom line.

XRX shares slipped 0.7% on Monday, holding up slightly better than the broad market. As I mentioned, Xerox is worth much more than the current price, so this presents a good bullish opportunity.

Buy XRX at $9.60 limit, good till canceled. Then, set up to sell all at target $10.40. Set a protective stop at $9.00 limit, good after 10:30 a.m. ET only.

Jon Markman writes a daily trading newsletter, Trader’s Advantage, and CounterPoint Options, a service geared towards helping individual traders make steady, consistent profits with the VIX. Follow him on Twitter for his latest take on markets and innovation.


Article printed from InvestorPlace Media, https://investorplace.com/2015/11/trade-of-the-day-xerox-xrx-2/.

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