Still Skeptical on Xerox Despite Split
The company is better positioned to improve its margin profile with Conduent operating as a stand-alone, but the future of its printing equipment business is weak.
On Jan. 3, 2016, Xerox (XRX) completed the divestiture of Conduent, its business process outsourcing operating segment. As a result, we are lowering our fair value estimate for this no-moat company to $8 per share from $11 per share. We think Xerox is in a much better position to improve its margin profile with Conduent operating as a stand-alone entity. In our view, the company’s decision to split its business process outsourcing operations from its printing business will simplify the decision-making process regarding which areas to focus on, while enabling the company to concentrate on improving revenue growth, margin expansion, and disciplined investments in attractive growing markets. However, we still believe the future of the company’s printing equipment business is bleak, as mobile devices serve as an alternative to print. Further, digitization of documents and electronic workflow have been eliminating paper in business processes. Although Xerox benefits from multiyear contracts across its services and print businesses, the operating environment is fiercely competitive, and we do not see the company benefiting from significant customer switching costs. In turn, we are skeptical of its ability to generate excess returns on capital over the next decade, resulting in our no-moat rating.
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Timothy Feeney does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.