Xerox (XRX): Accelerating sales and earnings growth

By J. Royden Ward, Editor of Cabot Benjamin Graham Value Letter
From Cabot Wealth Advisory 12/27/12 Sign up for free Cabot Wealth Advisory e-newsletter

I recently scoured my databases to find the best companies with low P/BV ratios. I found that 140 companies in my database of 1,000 companies have P/BV ratios of 1.20 or lower. I used several additional criteria to narrow the list of 140 companies by also requiring: Standard & Poor’s Earnings/Dividend ratings of B or better, low price-to-earnings (P/E) ratios, dividend yields of 1.0% or higher and good earnings prospects for the next 12-month and five-year periods.

My search turned up a couple of companies with storied pasts. Both companies had spectacular rises in years past before collapsing when new technologies passed them by. The companies have reinvented themselves and could become industry leaders again in just a few years. The stock prices of the two companies are bargains now and the companies look attractive to me. The stocks are Xerox and Corning.

Xerox (XRX) provides document equipment such as printing and publishing systems, digital copiers, laser and solid ink printers, fax machines, and digital multifunctional devices, which can print, copy, scan and fax. XRX’s acquisition of Affiliated Computer Services in 2010 more than doubled the company’s size and added a much needed steady income stream from long-term service contracts. Operating efficiencies and cross-selling opportunities, especially overseas, are resulting in a brighter outlook for the new Xerox.
XRX’s printing operations aim to capitalize on a shift in the document industry away from older copiers. The change to digital technology, a transition to color, and a move to the company’s exclusive less expensive solid-ink ColorCubes bodes well for future sales. I foresee EPS of 0.95 in 2013, 6% higher than a year ago before accelerating in future years.

The company is staying ahead of its competitors in new technology for its printers and copiers, but demand from corporations will remain soft until the global economy begins to improve. I continue to like Xerox, because the stock price is a steal and the Affiliated Computer acquisition holds great potential. Management is well aware that selling software and providing services will generate higher growth and more profits than sales of printer and copier hardware.

XRX shares sell at 7.7 times current EPS, which is a great price for a company with accelerating sales and earnings growth. The stock price is currently 30% below book value, which is unusual. And the dividend yield of 2.5% is a plus. The company’s new technologies and recent acquisitions add a needed spark to a company that has endured several transformations. XRX’s stock price will likely reach my sell target within 1 to 2 years.

I will continue to follow Xerox and other blue-chip, high-quality investments in my Cabot Benjamin Graham Value Letter.

Editor’s Note:
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