Unit Shift And ITsavvy And Lexmark Acquisitions Will Improve Efficiency

Key Takeaways

• New operating model and strategic acquisitions are expected to enhance organizational efficiencies, stabilize revenue, and improve operating margins by diversifying revenue streams.
  
• Focused selling and reinvention initiatives are projected to drive revenue growth and profitability, resulting in significant cost savings and improved free cash flow.
  
• Xerox faces challenges including revenue decline, market share losses, limited competition ability, integration risks, and finance receivable reductions impacting financial health and growth prospects.

Catalysts

Operates as a workplace technology company that integrates hardware, services, and software for enterprises in North America, Latin America, Europe, the Middle East, Africa, India, and internationally.

• The shift from a geographic to a business unit-led operating model is expected to improve organizational efficiencies and align better with economic buyers, positively impacting revenue and net margins in the long term.
  
• The acquisitions of ITsavvy and Lexmark are anticipated to stabilize revenue and enhance operating income margins by diversifying revenue streams and increasing market reach, affecting both revenue and operating margins.
  
• Sales force productivity improvements and a more focused selling approach are expected to improve revenue trajectory by driving new business signings and market share recovery in print equipment, impacting revenue growth.
  
• The full implementation of more than 100 reinvention initiatives aimed at enhancing revenue and profitability is expected to deliver significant cost savings and improve operating margins.
  
• The company's forward flow programs and debt leverage reduction plans are expected to improve free cash flow generation, impacting free cash flow and balance sheet health in the future.

Xerox Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Xerox Holdings's revenue will grow by 7.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -21.2% today to 31.8% in 3 years time.
• Analysts expect earnings to reach $2.5 billion (and earnings per share of $19.91) by about July 2028, up from $-1.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 0.8x on those 2028 earnings, up from -0.5x today. This future PE is lower than the current PE for the US Tech industry at 19.9x.
• Analysts expect the number of shares outstanding to grow by 1.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.6%, as per the Simply Wall St company report.

Xerox Holdings Future Earnings Per Share Growth

Risks

• The organizational changes and structural restructuring within Xerox have led to a significant decline in revenue, with the company experiencing a 9.7% decrease in 2024, which could indicate future challenges in reversing this trend and achieving stable revenue growth.
  
• The decline in sales force productivity and modest market share loss in print equipment suggest potential challenges in regaining market positioning and could hinder future revenue and profit growth.
  
• Xerox's Production print segment experienced rationalization and ceased manufacturing of high-end production equipment, potentially limiting its ability to compete in certain high-margin markets and impacting future revenue streams.
  
• The acquisition of ITsavvy and pending acquisition of Lexmark are expected to involve significant integration efforts and associated risks, with anticipated cost synergies that may not be realized as projected, impacting net margins and earnings.
  
• Xerox's declining finance receivable portfolio and reduction in forward flow program benefits could pose challenges to its cash flow generation and overall financial flexibility, affecting free cash flow and financial health.

Valuation

• The analysts have a consensus price target of $10.205 for Xerox Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $14.91, and the most bearish reporting a price target of just $5.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.7 billion, earnings will come to $2.5 billion, and it would be trading on a PE ratio of 0.8x, assuming you use a discount rate of 11.6%.
• Given the current share price of $5.45, the analyst price target of $10.2 is 46.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.