From manufacturing photographic paper and equipment in 1906 to services and document technology today, the company has evolved into an exemplar of innovation.
Yet, you would have lost money in the past five years if you'd invested in the stock. So, what's behind billionaire activist investor Carl Icahn's plan with this S&P 500 constituent? Icahn is now the second biggest shareholder. The stock now trades at around 10.47 times forward earnings, after losing 25.18% year to date.
Can Icahn weave his magic wand and revive Xerox's sagging fortunes? We dig deeper and see whether you should jump on board, or whether Xerox is among a group of stocks prepared to plunge in 2016.
The Unreliability of the "Icahn Way"
Several commentators suggest Xerox could soon mount a full-fledged recovery with impetus from Icahn, but we aren't so sure. So, before you put your faith on the 7 "Buy" ratings by Wall Street analysts, take a long, hard look at the details.
Icahn's a sound judge of stocks (and he's got the financial muscle to chase a stock he believes in). However, it's uncertain what's on his mind at this time: greater board representation, leadership change, spinning off assets, or an outright sale of the company? It could be any (or a mix) of all of these possibilities.
These stocks have shaky track records this year, joining a category of assets that are particularly vulnerable right now.
The Shadows in the Numbers
Led by chairman and CEO Ursula Burns, Xerox posted a third-quarter report card that reveals its problems. Adjusted revenues were down 7% year-over-year. Annuity revenues, which are 85% of topline, were down 7% after adjustments. Equipment revenues fell by a steep 11%. Both adjusted gross margin and operating margin slipped.
Xerox generated just $271 million in cash flow from operations during the third quarter. In the second quarter, this figure was $349 million. From the peak of $2.2 billion in 2010, it was $1.6 billion in 2014. In the last 12 months, that was down to $1.2 billion. Xerox expects full-year 2015 free cash flow from operations of around $1.3 billion to $1.4 billion. Xerox now has just a tad over $800 million in cash left.
All the share repurchases ($691 million in the third quarter) totaling $1.3 billion through the first nine months of 2015 can make earnings-per-share look good, but that's hardly impressive. If reducing the number of shares is done to make financial ratios look better, it raises doubts about management.
The cash scenario also casts shade on the otherwise meaty 2.63% dividend yield (which is partly due to the fall in stock price). It doesn't look sustainable in the long-run unless the company does something drastic to change the way it runs its business. And why do we say that? It paid $2 billion in share repurchases and dividends in the last 12 months when its net income was less than $400 million.
The Absence of Light at the End of the Tunnel
Burns, who joined Xerox as an intern, represents the days of yore -- the good old copier and printer era. The company board, chaired by her, has authorized a "review" of the company's business portfolio and capital allocation options. This could result in some much-needed spring cleaning. Or, it could be the beginning of a break up.
So, it remains to be seen if Icahn can script a dramatic turnaround. We suggest that you sit tight and take a pass on Xerox, until there's proof of a sustainable revitalization plan in place for its core businesses.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.