Insiders And Institutions Are Buying Xerox
Xerox (NYSE: XRX) gave a bad report for the Q1 2022 period but that bad news is being put to good use by at least one person. Carl Icahn, already a major shareholder of Xerox, made not one but two purchases of Xerox in the wake of the earnings fallout boosting his position to over 34.245 million shares. That’s worth about 22% of the shares outstanding keeping him firmly in the #1 position in regards to ownership. What this means for the company is uncertain because Mr. Icahn is known to be a vocal, opinionated, and often belligerent shareholder. There are rumors of a takeover but so far no word on if or when. What it means for the market, however, is that this stock has a firm floor in price action that we see leading to at least double-digit gains for investors.
In regards to the ownership structure, insiders not-counting Mr. Icahn owns less than 1% of the stock so don’t have much say in the overall scheme of things. The institutions, on the other hand, own about 80% of the company so there may be some volatility ahead. The institutions have also been buying, upping their stakes by 9.5% of the market cap over the last year, which brings us to the short-sellers. Short sellers have also been active in this name and are sure to have aided the fall to post-pandemic lows. The short-interest was over 7.0% at the last report and may have gone up in the interim. This has the stock set up for short-covering and a short-covering rally at the least, assuming of course Mr. Icahn is right and the stock should be trading at a higher multiple than 15X earnings.
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Inflation Smears The Ink For Xerox
Business for Xerox is not bad but the results were hampered by inflation. The company reported $1.67 billion in consolidated revenue for a decline of 2.3% versus last year but this is 245 basis points better than expected. The revenue was driven by rising demand in all end markets and backlogs are growing as well. The bad news is that inflationary costs cut deeply into the bottom line and shaved 540 basis points off of the operating margin. The company says it is working on price increases and internal efficiencies to offset the margin decline but those efforts won’t be seen until future reports. Until then, the company turned in a GAAP and adjusted operating loss and adjusted earnings of -$0.12 per share.
Turning to the guidance, the outlook is good. Not only are backlogs growing but margins are expected to widen and offset the earnings miss in Q1. The full-year outlook includes maintaining the FCF guidance and the expectation that at least half of the “at least $400 million” would be returned to shareholders. As it is now, Xerox is paying a nice dividend worth over 5.70% and we see the distribution growing. The company’s $1.00 in payout is worth about 75% of the expected capital return which leaves room for a dividend increase and share repurchases.
The Technical Outlook: Xerox Falls To 18-Month Low
Shares of Xerox fell to their lowest level since the pandemic bottom of 2020. This low was used as a buying opportunity by at least one major shareholder and we suspect the institutions were also involved. Regardless, the drop to $17 was met by buyers and it looks like this level will hold. A fall below this level would be bearish but we don’t see it happening without a major change in Carl Icahn’s and/or the institutional ownership. It is more likely that price action will bob along at this level until the next catalyst emerges and that will likely be bullish.
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