Xerox Holdings (XRX) is a leading producer of printers and copiers. The company also has a sizable managed print services and sells a range of related supplies including paper and cartridges, notes Bruce Kaser, editor of Cabot Turnaround Letter.

Equipment sales represent about a quarter of total revenues, with the balance coming from post-sale revenues including a small contribution from its equipment leasing segment. About 35% of sales are produced outside of the Americas.

Xerox has suffered from a secular shift away from printing and copying as well as from this year’s pandemic-driven work-from-home trend.

Weak demand led to its revenues declining 19%, and adjusted operating profits declining 50%, in the third quarter. Revenues from mid-range enterprise equipment, which produces 70% of total equipment sales and is a key driver of post-sale revenues, fell 15% in the quarter.

In addition to the weak demand outlook for equipment and services, investors worry about intense price competition. Printers, services and supplies are mostly commoditized in the lower and mid-tier size ranges, where substitution is common. Investors have pushed Xerox shares down 40% this year, even after the vaccine-driven bounce.

Investors underestimate the value of Xerox shares. What makes the shares valuable is not their growth prospects (there are none) but rather the company’s generous free cash flow and cash-heavy balance sheet.

We conservatively estimate that Xerox’ revenues will recover to about 75% of their former level, then resume their 3-5% decline path.

Xerox, trading at a low 5.4x EV/EBITDA, holds considerable turnaround promise.  We recommend the purchase of Xerox shares with a 33 price target.

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