Adding Xerox as a Core Position

ImageXerox is another stock that meets my screening criteria.  The stock pulled back 1% today, creating a nice entry-point.

Xerox is a household name and one of the most reconizable brands in the world.  It belongs to an exclusive group of brands whose names have become verbs (“hey, can you Xerox this document for me?”).  But therein lies the problem: can a brand that is synonymous with photocopying, which is an outdated technology, remain relevent and grow its earnings?  Xerox is trying.

Xerox is slowing transforming itself from a photocopier and ink company to a service company.  It remains to be seen if this transformation will be successful, making this a slighhtly speculative investment.  However, the fundamentals and growth estimates are strong, so I have bough the stock.

ImageI  analyzed the stock using my usual procedures. The results are as follows.

  • The P/E Ratio is 8.24, which is much lower than the average historical P/E of 13.58, and the Graham Number is $15.35
  • The Dividend Yield is 2.58%, and the coverage is 470%.  I’d prefer a bigger yield, but Xerox does tend to increase its dividend over time.
  • Forecast Growth Rate is marginal at 7.51%, which is likely why the P/E Ratio is lower than the average.  A successful transformation will increase growth considerably, and boost the price.
  • The Gordon Return (Dividend + Growth) is 10.1%
  • The Margin of Safety at current prices is 34%.  This is very high, and this gives me confidence to take the risk of buying the stock.

I believe that the stock is fairly priced here.

  • Buy XRX @ $8.90
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