How Cheap Is Xerox's Stock by the Numbers?

Before you go, we thought you'd like these...
Before you go close icon

Numbers can lie -- yet they're the best first step in determining whether a stock is a buy. In this series, we use some carefully chosen metrics to size up a stock's true value based on the following clues:

  • The current price multiples.
  • The consistency of past earnings and cash flow.
  • How much growth we can expect.

Let's see what those numbers can tell us about how expensive or cheap Xerox (NYS: XRX) might be.

The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share (EPS) -- the lower, the better.

Then we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow, which divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). As with the P/E, the lower this number is, the better.

Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.

Xerox has a P/E ratio of 10.2 and an EV/FCF ratio of 11.2 over the trailing 12 months. If we stretch and compare current valuations with the five-year averages for earnings and free cash flow, we see that we see that Xerox has a P/E ratio of 15.5 and a five-year EV/FCF ratio of 11.4.

A positive one-year ratio of less than 10 for both metrics is ideal (at least in my opinion). For a five-year metric, less than 20 is ideal.

Xerox has a mixed performance in hitting the ideal targets, but let's see how it stacks up against some of its competitors and industry mates. 

Company

1-Year P/E

1-Year EV/FCF

5-Year P/E

5-Year EV/FCF

Xerox10.211.215.511.4
Hewlett-Packard (NYS: HPQ) 7.59.06.88.4
Eastman KodakNMNMNMNM
Lexmark International (NYS: LXK) 7.37.89.16.5

Source: S&P Capital IQ; NM = not meaningful because of losses.

Numerically, we've seen how Xerox's valuation rates on both an absolute and relative basis. Next, let's examine ...

The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash-flow generation.

In the past five years, Xerox's net income margin has ranged from 2% to 5.8%. In that same time frame, unlevered free cash flow margin has ranged from 7.9% to 11.8%.

How do those figures compare with those of the company's peers? See for yourself:

anImage

Source: S&P Capital IQ; margin ranges are combined.

Source: S&P Capital IQ; margin ranges are combined.

In addition, over the past five years, Xerox has tallied up five years of positive earnings and five years of positive free cash flow.

Next, let's figure out ...

How much growth we can expect
Analysts tend to comically overstate their five-year growth estimates. If you accept them at face value, you willoverpay for stocks. But even though you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared with similar numbers from a company's closest rivals.

Let's start by seeing what this company's done over the past five years. In that time period, Xerox has put up past EPS growth rates of -10.1%. Meanwhile, Wall Street's analysts expect future growth rates of 13.1%.

Here's how Xerox compares with its peers for trailing-five-year growth (because of losses, Kodak's trailing growth rate isn't meaningful):

anImage

Source: S&P Capital IQ; EPS growth shown.

Source: S&P Capital IQ; EPS growth shown.

And here's how it measures up with regard to the growth analysts expect over the next five years (there are no analyst estimates for Kodak, which is just as well given its potential bankruptcy):

anImage

Source: S&P Capital IQ; estimates for EPS growth.

Source: S&P Capital IQ; estimates for EPS growth.

The bottom line
The pile of numbers we've plowed through has shown us the price multiples that shares of Xerox are trading at, the volatility of its operational performance, and what kind of growth profile it has -- both on an absolute and a relative basis.

The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at a 10.2 P/E ratio, and we see that Xerox is pretty cheap-looking by all its price multiples (though more expensive than HP or Lexmark). It's managed to maintain profitability throughout the past five years despite negative growth. However, in comparison, the numbers for HP are even more interesting, with better margins and actual growth. Lexmark had some slight unprofitability, but its margins were around Xerox's range and it experienced growth.

So, to summarize, Xerox is showing some cheapness as the market doubts its prospects, but HP and Lexmark are even cheaper. All three may be worth looking into in case your read on the future differs with the market's. Continue your due diligence process until you're confident one way or the other. As a start, add it to My Watchlist to find all of our Foolish analysis.

I wrote about a stock that's flying under the radar in our brand new free report: "The Stocks Only the Smartest Investors Are Buying." I invite you to take a free copy to find out the name of the company I believe Warren Buffett would be interested in if he could still invest in small companies.

At the time this article was published Anand Chokkaveludoesn't own shares in any company mentioned. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners