It's Time to Buy Xerox Stock. Here's Why.
May 26th 2013 11:45AM
Updated May 26th 2013 7:00PM
It might not be obvious to the casual observer, but right now, today, Xerox stock offers one of the best values available in the IT industry. Why?
Xerox stock is cheap
When you stack up Xerox stock against two of its rivals in the international "business process outsourcing" industry -- Accenture and IBM -- it's clear that Xerox is one of the cheapest options out there. Its 9.7 price-to-earnings ratio falls 32% below the P/E of IBM. It sells for a whopping 45% discount to the price of a share of Accenture.
And as is so often the case, with a low valuation comes a big boost in dividend yield. Xerox stock currently yields a tidy 2.6% dividend. That's as compared with Accenture and IBM, both of which yield less than 2%.
Xerox: A cheap price for low expectations
Why aren't investors paying up for Xerox stock (yet)? Part of the reason, one presumes, is because no one's expecting the stock to do very much over the next five years. Of the three firms named, Xerox currently sports the lowest projected growth rate.
But while that sounds bad, if you turn this fact on its head, low expectations might actually turn out to be good news for investors in Xerox stock. After all, if no one's expecting much growth out of the company, then Xerox has a low hurdle to clear.
It has to be easier for Xerox stock to exceed expectations for 6.7% earnings growth, after all, than it will be for Accenture to deliver better than 11.4% growth. (And with sales growth alone having averaged 5.4% annually over the past five years, there's every reason to believe Xerox can at least hit its targets going forward).
Xerox stock pays you best
Perhaps most important to investors, though, is the simple fact that out of the three big IT companies discussed here, Xerox is the one generating the most cash from its business -- and it gives you the biggest free cash flow bang for your buck.
Measured by dividing a company's market capitalization (the price you pay for Xerox stock) into its free cash flow (the money your investment generates for you), Xerox offers investors easily the best "free cash flow yield" of the three companies named. Put even more simply, for every $1 you invest in a share of Xerox stock today, you can expect the company to generate nearly 17.4 cents worth of real, cash profits on your investment.
Xerox may ultimately use this cash to pay you bigger dividends (although its 2.6% dividend is already pretty big), to buy back shares (increasing the size of your stake in the company for every share it takes off the table), or to reinvest in its business and maintain its lead over rivals for years to come. Any way you look at it, though, Xerox's ability to generate cash offers investors a great reason to invest.
And that, Fools, is the reason I think now's a great time to buy Xerox stock.
The article It's Time to Buy Xerox Stock. Here's Why. originally appeared on Fool.com.Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Accenture and owns shares of IBM. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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