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Shares of Xerox Holdings Corp. (NYSE: XRX) fell by 11.5% on October 26 to close trading at $18.2. The recent pullback has wiped off the stock’s year to date gains and XRX is now down 1.7% in the last year and has declined by almost 30% in the last five years, grossly underperforming the broader markets.
In the third quarter of 2021, Xerox reported sales of $1.77 billion and adjusted earnings per share of $0.48. Comparatively, analysts forecast Q3 sales of $1.81 billion and earnings of $0.44 per share. We can see that Xerox surpassed earnings forecasts in the third quarter, but fell short of top-line estimates which led to the steep decline in XRX stock.
Further, its sales were down 0.5% year over year as the company was impacted by supply chain disruptions and the Delta variant. Xerox’s gross and operating profit margins also declined year over year in Q3. This was offset by a tax benefit totaling $4 million that allowed the company to grow its profits by 17% in the quarter.
Xerox expects near term weakness to continue to impact sales in the near term and narrowed revenue guidance to $7.1 billion in 2021, compared to Wall Street estimates of $7.3 billion.
Alternatively, the company’s management confirmed it remains on track to deliver over $500 million in free cash flow in 2021 which values the stock at just 12 times enterprise value-to-free cash flow.
An overview of Xerox?
Xerox Holdings is a workplace technology company that designs, develops and sells document management systems and solutions in the U.S., Canada, Europe and other international markets.
It offers intelligent workplace services as well as digital services that leverage software capabilities in workflow automation, personalization and communication software, as well as content management solutions and digitization services.
The company now aims to improve its operating model for greater efficiency which includes plans to mitigate supply chain issues. Xerox has emphasized the importance of investing in emerging technologies such as augmented reality and robotic process automation as well as in business process outsourcing and system enhancements to expand its revenue base and drive efficiencies.
Xerox is also poised to focus on the expansion of software offering to transform the service experience. These goals will be met by scaling IT Services and robotic process automation in the SMB market.
While these strategies might help the company to increase revenue metrics over time, investors should understand Xerox has seen its sales decline from $10.26 billion in 2017 to $7 billion in 2020. Its operating income also fell from $931 million to $417 million in this period.
As mentioned earlier, Xerox expects to generate over $500 million in free cash flows this year, allowing the company to deploy excess capital to acquire companies as well as increase investor wealth via share buybacks.
Is XRX stock undervalued or a value trap?
Wall Street expects sales to rise by a marginal 3.4% to $7.26 billion in 2021 and then decline by 1.7% to $7.13 billion next year. However, its earnings are forecast to rise by 26% to $1.78 per share in 2021 and by 22% to $2.17 per share in 2022.
Given its market cap of $4.70 billion, XRX stock is valued at a forward price to sales multiple of just 0.4x and a price to earnings multiple of 10.22x. It also pays investors a tasty dividend yield of 4.9%.
We can see that XRX stock is valued at a discount due to its falling sales and declining profit margins, making it difficult for Xerox to outpace the broader markets over the long-term.
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