Xerox has been on fire lately. In the past six months alone, the company’s stock price has rocketed 67.2%, reaching $3.01 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Xerox, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Xerox Will Underperform?
Despite the momentum, we’re sitting this one out for now. Here are three reasons we avoid XRX, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Regrettably, Xerox’s sales grew at a sluggish 1.5% compounded annual growth rate over the last five years. This was below our standards.
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Xerox, its EPS declined by 50.9% annually over the last five years while its revenue grew by 1.5%. This tells us the company became less profitable on a per-share basis as it expanded.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Xerox’s $4.22 billion of debt exceeds the $495 million of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $734 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Xerox could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Xerox can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Xerox doesn’t pass our quality test. Following the recent rally, the stock trades at 9.4× forward P/E (or $3.01 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. Let us point you toward our favorite semiconductor picks and shovels play.
Stocks We Like More Than Xerox
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