Marking the conclusion of a prolonged saga that was riddled with legal battles and several strategic maneuvers, Carl Icahn (Trades, Portfolio) finally threw in the towel on Xerox Holdings Corp. (XRX, Financial).
His firm, Icahn Capital, recently eliminated its position in the imaging technology company. On Sept. 28, Xerox agreed to buy the firm's entire 34.24 million-share stake at $15.84 apiece, the closing price of the stock on Sept. 27. Concurrently, Icahn board representatives Jesse Lynn and Steven Miller and independent director James Nelson resigned from Xerox's board. An April 2021 support agreement between Xerox and Icahn has been terminated, though standstill provisions will remain in effect until 30 days after the 2025 shareholders meeting. Xerox stock has a year-to-date loss of about 17%.
GuruFocus data estimates that Icahn Capital incurred a substantial loss in its foray into Xerox in the neighbourhood of 42%. This marks the conclusion of an unsuccessful investment that began in 2015. The activist investor called on the company to explore strategic alternatives and enhance its operations, while also seeking representation on the board. Shortly thereafter, Xerox announced a division into two publicly traded entities, segregating its service and hardware businesses.
In response to Icahn's involvement, Xerox granted him three seats on the board. In 2018, Icahn, along with another shareholder, Darwin Deason, vehemently opposed a proposed merger between Xerox and Fujifilm Holdings Corp. (TSE:4901, Financial), arguing the deal undervalued Xerox. They also raised concerns about the competency of Xerox's management, demanding the removal of then-CEO Jeff Jacobson. This led to a legal battle, temporarily halting the merger and eventually resulting in Xerox walking away from the deal, accompanied by Jacobson's resignation.
Following Xerox's withdrawal, Fujifilm claimed there were no legal grounds for Xerox's termination of the transaction. They initiated a lawsuit against the company, which ultimately culminated in a settlement where Fujifilm agreed to purchase Xerox's stake in their Asia Pacific joint venture for $2.3 billion in 2019.
Icahn found himself entangled in this convoluted narrative as well. In 2019, he faced a lawsuit from a Xerox investor who alleged that he had acquired shares in HP Inc. (HPQ, Financial) with prior knowledge of Xerox's impending bid for the company.
Icahn, who had earlier encouraged merger discussions between Xerox and HP, disclosed a 4.24% stake in Xerox in the same year before divesting in 2020. HP repeatedly rebuffed multiple acquisition offers from Xerox, leading to the launch of a hostile tender offer. However, Xerox abandoned this hostile bid in March 2020, citing the disruption caused by the Covid-19 pandemic.
Operations overview
Xerox operates as a company specializing in document management solutions. Its product range encompasses printers, copiers, software solutions, managed print services and cloud computing solutions. The company divides its operations into two distinct and reportable segments.
The first, Print and Other, focuses on the design, development and sale of comprehensive document management systems, solutions and services. It also offers associated technology solutions, including information technology and software products and services.
The second segment, Financing (FITTLE), primarily engages in providing financing options for the purchase of Xerox equipment as well as non-Xerox office equipment.
Valuation
The GF Value Line suggests the stock may be a "value trap" given that it is trading far below its intrinsic value.
Further, the GF Score is mediocre at 73 out of 100 with poor profitability and growth ratings.
However, its dividend yield is very high at 7.28%.
Xerox's valuation chart shows excellent value. However, a lack of growth means it is likely a melting ice cube, though at a price-earnings ratio of less than 6, investors are not paying for any growth. Generally as a rule of thumb, any stock with a price-earnings ratio below 9 is not priced as a growth stock.
Discussion
Xerox's primary printing business is currently in a declining phase, with stronger competitors steadily encroaching on its market share. As a result, the company's outlook for the near future lacks upside, so the likelihood of further revenue decline looms.
Despite ongoing efforts to foster growth, there have been little demonstrable results at this point. Moreover, Xerox struggles to distinguish itself from more robust rivals such as Canon (TSE:7751, Financial) and HP, casting doubt on whether these initiatives will yield significant returns.
While Xerox may seem undervalued, boasting a price-earnings ratio and a price-to-free cash flow ratio of around 7 as well as a dividend yield exceeding 7%, its long-term prospects are unattractive. However, it is a good income stock with a long tail as long as it manages its costs carefully.
Icahn bought his position in Xerox starting around 2015 and finally eliminated it eight years later after trying multiple maneuvers like spinning off its services business and trying to combine with HP, which proved unsuccessful. This goes to show that even legendary gurus make mistakes.
While the guru incurred a considerable loss, a new investor coming in now may buy it for its lush dividends and income potential as long as they do not hope for much capital gains. Xerox has grown the dividend at around 3% per annum over the past five years and also has a history of buying back stock with excess cash flow.
Overall, my impression is that this is a good income stock as part of a diversified portfolio. However, absent an acquisition attempt to another company or a private equity investor, it does not look like there is much capital appreciation to be expected given the secular decline of print and copying, though imaging continues to hold its own.
