Xerox (XRX)

The company applied a proven technology to the enterprise level office multifunction color segment. ColorCube removes cost barrier for printing color documents in the office. This should increase usage and post-sale revenues. Solid ink is reliable, produces great quality, simpler to use and is better for the environment. Xerox has also greatly expanded sales channels and sales coverage in recent years.

2010: 2.6bn CFO = $2.0bn FCF on $13bn EMV = 15.4% FCF Yield 11H2 share repos add to eps

XRX is guidaing investors to expect 2010 CFO of $2.6 billion, which translates into FCF of $2.0 billion, a number cited in a recent analysis by Moody's.

With the stock in the $9.50 range recently, the approximately 1.365 billion shares give the company a $13 billion equity market cap.

Given FCF of $2.0 billion, that is a "FCF Yield" of about 15.4%. This is way too high.

The typical reason given for the stock needing such a low valuation is that they have limited growth. I would say the counterargument to this is that the company has tremendous levels of recurring revenue, which should mean a lower discount rate would be applied in a DCF valuation methodology.

With the ACS deal having closed a few months ago, debt is a bit elevated at present, but the company anticipates repaying most of the debt from this prodigious stream of FCF between the closing date and the middle of 2011. After that, the company is expected to return to share repurchases, adding a significant boost to the e.p.s. growth rate.

On 29 Sep 2009, Xerox agreed to acquire Affliiated Computer Services for $6.4 billion in cash and stock. Xerox is moving swiftly to galvanize the copier and printer giant, which has steadied its balance sheet in recent years but has been mired in slow-growth businesses for the last 10 years. Both companies hope their combination will accelerate the growth of Xerox's business of managing printing and document services for corporate and government customers. With share price at $7- ish, it is good time to go long. Marcus.tan.yi.wei 14:17, September 28, 2009 (PDT)

Reference

1. "Xerox to Acquire ACS in $6.4 Billion Deal " Article from Wall Street Journal
2. "Xerox Buys Outsourcing Company for $6.4 Billion " Article from New York Times