Xerox Is the Biggest Secret in Value Stocks as It Moves Beyond Copiers

NEW YORK (TheStreet) -- One of the best-kept secrets in value stocks is one of the best-known names in business.

Xerox (XRX) is a surprising value stock that has moved far beyond copiers into information technology and document management. But it is still being priced like a copier stock.

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). 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) 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.

XRX Chart
data by YCharts

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.

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