Many shares have come off their March lows to hit recent highs. However there are exceptions, such as Xerox (NYSE:XRX). Xerox stock currently hovers around $15.15 and slowly inching down to its 52-week low of $14.22 seen on May 14. Year-to-date, the stock is down 60%.
Today I’ll take a closer look at what long-term investors may expect of Xerox stock and whether it may be a good buy at current levels. If you are not yet a shareholder, you may want to see the next quarterly report to commit new capital into the printer-and-copier company. Let’s see why.
Norwalk, Connecticut-based Xerox may be globally best-known for producing photocopiers. But its product portfolio also includes printers, facsimile machines, multifunction products (printer, fax, copier), and document consultancy. Nonetheless, its core business is still printing. Its number 318 position among Fortune 500 companies understandably increases the level of interest in Xerox stock.
Xerox Stock and Q2 Earnings
Management is expected to report earnings next in late July. When the company released its Q1 results in late April, investors were not impressed.
Revenue was $1.86 billion meant a decrease of 14.7% YoY. Adjusted EPS of 21 cents missed analysts’ estimates. Furthermore operating cash flow of $173 million decreased $49 million YoY. Free cash flow of $150 million declined $57 million YoY.
The company withdrew 2020 financial guidance due to economic uncertainty caused by the pandemic.
“The most significant near-term impact from the crisis is on our equipment and unbundled supplies sales which are transactional in nature. Sales are expected to decline significantly as businesses hold off or delay purchases during the closure period,” it said.
In other words, during Q1 the group’s operational performance has declined. Therefore, when Xerox reports Q2 earnings, investors will pay attention to actual metrics as well as further guidance by management.
It is important to remember that revenues have been in decline for several years now. And unless that trend improves, Xerox stock price is unlikely to reach new highs in the near future.
Xerox Needs a New Growth Story
Xerox’s history goes back to 1906. Seasoned investors may remember that the company enjoyed high “blue chip” status and monopoly position, especially in the early 1970s when it had record profits. For example, in 1971, it introduced the first color printer. However, by the end of the decade, following the resolution of an anti-trust lawsuit with the U.S. Federal Trade Commission (FTC), it lost its monopoly position in the U.S. copier market.
“Until the 1980s, Xerox enjoyed unprecedented growth. Its products embodied sophisticated technologies which Xerox safely guarded behind a wall of patents, said Philip Seltsika of Brunel University. “As these patents began to expire, competition developed and by 1982 Xerox’s share of global profits had been halved. Most of the competition was from Japan.”
The 1990s energized the company as it successfully developed digital photocopiers and the company was in the lead again.
Many technology analysts also believed the company would play a dominant role in personal computers, especially through the work done at its Palo Alto Research Center (PARC). Yet, management was not successful in that area, and the early 2000s saw increased debt levels. Accounting irregularities or rather a scandal at the company also made the news headlines.
The new century saw various acquisitions as well as spin-offs and sales. But the company never reached the greatness it hoped for. In 2019, Xerox was in the news with its hostile takeover bid for HP (NYSE:HPQ). Despite the efforts of activist investor Carl Icahn, that acquisition fell through as Xerox dropped the bid. Its final offer for HP had been valued at $24 per share.
Many analysts agree that Xerox would need a new chapter in its timeline that would bring in tailwinds as well as new long-term investors into the stock. Otherwise, the company may not be likely to offer much in terms of shareholder value.
Xerox Stock’s Price Action Urges Caution
Are you an investor who also pays attention to technical charts? Then you may be interested to know that both the long-term and short-term charts of Xerox stock suggest there may be more pain ahead.
Let’s first go back in history. The stock’s best decade was in the 1990s. In November 1989, the shares were around $12. To the delight of shareholders, by May 1999, Xerox stock price went over $170. However, by December 2000, it hit $9.88.
Since then, the highest level for Xerox stock has been $53.18 seen in July 2007. For the most part, the share price has hovered between $40 and $15. As you may have noticed, the long term price action in the shares corresponds with the fundamental developments in the company’s history.
Where are we in 2020? Xerox stock started January around $37. But on March 19, XRX stock saw an intraday low of $15.01. That week marked the 52-week low in many shares. And Xerox stock too participated in the initial rally. By early April, the shares were above $20.
However, by May 14, the shares were down to a 52-week low of $14.22. In early June, XRX stock once again went over $20. And now it is hovering at $15.
Put another way, Xerox stock has not been able to provide investors with an attractive return for along time. And the shares have been rather volatile, torn between a battle between long-term investors and short-term traders.
The recent short-term action may be a sign that Xerox stock will likely go below $15 yet once again. In case of broader market weakness, it may head down to $12.5 and even $10.
The Bottom Line on Xerox Stock
In recent years, Xerox’s earnings history has been volatile and the stock price has reflected that instability. Then in 2020, amid the pandemic chaos in broader markets, Xerox had to drop its dream of buying HP. Therefore management has to come up with other means of growth for the company.
Until the fundamental outlook of the company changes with favorable tailwinds, I’d not look to buy the shares. I’d at least wait to analyze the upcoming Q2 results.
Many shareholders enjoy Xerox’s stable dividend payment. Yet InvestorPlace‘s Louis Navellier cautions investors about a potential dividend cut in XRX stock. If management were to make such an announcement soon, then the shares would suffer.
In case of an unlikely potential move to the upside, the $20-level has become major resistance. Therefore, Xerox stock would need to go and stay over $20 for a new sustained move up to happen.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education, including a Ph.D. degree, in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.