Xerox Corporation (NYSE:XRX) has become synonymous with the copying industry, so much so that office workers will actually refer to a copier manufactured by another company as “the Xerox.” However, with lower corporate spending and lower margins leading to flat revenue, I believe that this particular company is a bit too pricey, even at the single-digit P/E multiples that it trades for.
Xerox is one of the leaders in document equipment, such as printers, copiers, fax machines, and multifunction devices. The company operates in over 160 countries, but most revenue (64%) comes from the U.S.
45% of Xerox Corporation (NYSE:XRX)’s sales come from the Technology segment, which includes all of their machines sold to businesses and individuals. The rest comes mainly from the Services segment, which involves business process outsourcing (BPO), document outsourcing, and information technology outsourcing.
Most of Xerox Corporation (NYSE:XRX)’s recent growth can be attributed to its acquisition of Affiliated Computer Services (ACS) for $6.4 billion, and this deal tremendously increased the company’s service capabilities. Before the merger, 80% of ACS’s income came from services which include equipment rentals, maintenance, supplies, and financing.
Challenges facing Xerox are mainly due to two things: decreased enterprise/government spending and dropping margins. The latter is due to the intense competition and pricing pressure from other companies such as Canon Inc. (ADR) (NYSE:CAJ) and Hewlett-Packard Company (NYSE:HPQ), both of which are several times larger and more financially flexible than Xerox.
On the surface, Xerox looks relatively cheap, trading at just 7.1 times forward earnings. However, given the debt load of the company, and the stagnant growth projections for the next few years, this may even be too much.
Xerox’s revenues dropped 1% in 2012, and are projected to increase by 1.5% in 2013, however a slightly better operating margin is expected to produce earnings growth. 2013’s consensus earnings of $1.12 per share are expected to rise to $1.19 and $1.27 in 2014 and 2015, respectively, for earnings growth of 6.3% and 6.7%.
This still sounds like pretty reasonable valuation, until you factor in the company’s $8.4 billion in long term debt. When you add this to Xerox’s market cap of $10.3 billion, the market is actually valuing Xerox Corporation (NYSE:XRX) at about $14.70 per share or 13.1 times forward earnings, which is a bit high considering the slow and uncertain growth.