NEW YORK (TheStreet) -- One of the best-kept secrets in value stocks is one of the best-known names in business.
And that will provide savvy investors with a great investing opportunity.
Here's what Xerox is doing now: On Tuesday it won the $500 million contract to run New York's Medicaid management system, one of the biggest in the U.S. A spokesman for the New York Health Department confirmed it. IBM beat out Hewlett-Packard (HPQ) - Get Report. The deal still has to be approved by the New York state comptroller.
Some copier company.
Xerox is an iconic brand name with a relatively small $14.3 billion market cap. At the Thursday close of $12.30, shares are up nearly 2% for the year to date but nearly 38% for the past 52 weeks. The stock has an unusually low forward PE ratio of slightly more than 10. The company's ratio of its enterprise value to earnings before interest, taxes, depreciation and amortization (EV/Ebitda) is less than 7, according to FactSet.
In other words, Xerox is being priced like a printer company such as Canon (CAJ) - Get Report even though the majority of Xerox's revenue comes from its information technology and other outsourcing services.
This disparity results in XRX shares being priced low enough to attract a takeover offer from a larger competitor like Hewlett-Packard, with its total cash of over $15 billion and a market cap of nearly $63.6 billion.
Here is a one-year chart of Xerox's stock.
The chart reminds us that although the stock is up a fraction for the year to date it has skyrocketed over 40% since June 2013. At the end of the first quarter of 2014 the company had trailing 12-month free cash flow of $2.35 billion and operating cash flow of about $2.75 billion.
TheStreet rates Xerox a buy for some very good reasons: "The company's strengths can be seen in multiple areas, such as its solid stock price performance, attractive valuation levels, good cash flow from operations, largely solid financial position with reasonable debt levels by most measures and expanding profit margins."
If it wins the New York Medicaid management business Xerox's revenue would exceed the present $21 billion per year level. Free cash flow for 2014 may run as high as $1.4 billion, nearly 10% of the company's market cap.
Bigger competitors that grow by acquisition -- including Hewlett-Packard and Accenture (ACN) - Get Report with its nearly $51 billion market cap -- may decide to acquire Xerox before the share price moves much higher.
Shares of Xerox offer investors a current dividend yield-to-price of 2.03%. Patient investors may want to wait to see if shares test the May 15 low of $11.75. At that price the dividend yield increases to 2.13%.
Since shares trade at a trailing price-to-sales (P/S) ratio of less than 0.70, my 12-month price target is $15.40, 25% above the Thursday closing price.
At the time of publication the author had no positions in any of the companies mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
Marc Courtenay is the founder and owner of Advanced Investor Technologies LLC as well as the publisher and editor of www.ChecktheMarkets.com.