ModernGraham Valuation: Xerox Corporation (XRX)

moneyCompany Profile (obtained from Google Finance): Xerox Corporation provides services and technology to enable its customers from small businesses to large global enterprises to focus on their core business. The Company is a diversified business process outsourcing company managing transaction-intensive processes. This includes services which support all enterprises through offerings, such as customer care, finance and accounting and human resources, as well as vertically focused offerings in areas, such as healthcare, transportation, retail and telecommunications, among others. It is engaged in designing, developing and delivering information technology (IT) solutions that leverage its secure data centers, help desks and managed storage facilities around the world to provide IT infrastructure. The Company operates in three segments: Services, Document Technology and Other. Effective August 13, 2013, Xerox Corporation acquired CPAS Systems Inc.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $11.42
MG Opinion Fairly Valued
Value Based on 3% Growth $12.12
Value Based on 0% Growth $7.11
Market Implied Growth Rate 3.03%
Net Current Asset Value (NCAV) -$7.23
PEmg 14.56
Current Ratio 1.43
PB Ratio 1.24

Balance Sheet – 9/30/2013 

Current Assets $8,070,000,000
Current Liabilities $5,646,000,000
Total Debt $6,406,000,000
Total Assets $29,016,000,000
Intangible Assets $11,755,000,000
Total Liabilities $16,970,000,000
Outstanding Shares 1,231,110,000

Earnings Per Share

2013 (estimate) $0.94
2012 $0.90
2011 $0.93
2010 $0.45
2009 $0.55
2008 $0.26
2007 $1.19
2006 $1.22
2005 $0.90
2004 $0.78
2003 $0.36
2002 $0.10

Earnings Per Share – ModernGraham 

2013 (estimate) $0.84
2012 $0.73
2011 $0.65
2010 $0.59
2009 $0.71
2008 $0.82

Conclusion:

Xerox Corporation has relatively stagnant earnings and does not pass the requirements for either the Defensive Investor or the Enterprising Investor.  The company is not suitable for the Defensive Investor because of its poor current ratio, lack of a consistent dividend history over the ten year historical period, and its failure to grow earnings adequately over the ten year period.  For the Enterprising Investor, the high level of debt relative to the company’s current assets is the determining factor.  Either type of investor may be better suited looking through some of the Defensive and Enterprising companies ModernGraham has found to pass the requirements.  As for a valuation, the company has not shown significant growth in its EPSmg (normalized earnings), however the market is only implying a growth rate of 3.03%, which is supported by the historical performance.  As a result, the company appears to be fairly valued at the current time.

What do you think?  Do you agree that Xerox Corporation is fairly valued?  What would be your assessment?  Is the company not suitable for Defensive Investors or Enterprising Investors?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Xerox Corporation (XRX) at the time of publication and had no intention of changing that position within the next 72 hours.

Photo Credit:  Andrew Magill


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