Xerox is cheap, but there isn't that much to get excited about ...

Xerox is now a pure play Document Technology company.  So you can now invest in a pure play low margin business in secular decline without the distractions associated with a potential low margin low quality consulting business they had previously developed in Conduent.

Here is what Xerox does.  They haven't updated the description since the separation, but ignore the Services bit:

"Xerox Corporation is engaged in imaging, business process, analytics, automation and user-centric insights. The Company's segments include Services, Document Technology and Other. The Company's Services segment comprises two types of service offerings: Business Process Outsourcing (BPO) and Document Outsourcing (DO). Its DO offers services, such as managed print services (MPS), which include workflow automation and centralized print services (CPS). Its BPO business includes services that support enterprises through multi-industry offerings, such as customer care, transaction processing, finance and accounting, and human resources, as well as industry-focused offerings in areas, such as healthcare, transportation, financial services, retail and telecommunications. Its Document Technology segment includes the sale of products and supplies, as well as the associated technical service and financing of those products. Its Other segment includes paper sales in its market countries."

Looking at the segment profit figures the company released (here: http://xerox.bz/2iBbQBG), first three quarters of operating profit for 2014,2015,2016 were $839MM, $715MM and $601MM, respectively. That's a vicious decline of 15% each year.

Apparently, they have multi-year contracts that provide for an annuity like stream of cash flows.  While I haven't looked into these contracts, my first question is, how would their profitability be suffering if they didn't have "multi-year" contracts.  With friends like these, who needs enemies.

There isn't a whole lot to get excited about here, besides the fact that Xerox trades at a pretty cheap valuation and has a high FCF yield. Their financials show in the region of $960MM of operating profit from the Document Technology segment at a 13% margin. This business is in secular decline.

JPM produced a typically bullish price target of $10, which strikes me as aggressive.  JPM calculate free cash flow of around $900MM at some point in the future (thanks to a bunch of cost savings initiatives etc.), so with the market cap at $7.2b, you have a FCF yield of 12.5%. JPM might be a little bullish here IMO. The business is a low margin hardware company in secular decline. The bullish thesis is that most of this revenue is annuity like, which is true, but this is a declining annuity.  The bulls also argue that the market is "missing" the fact that most of their debt is backed by receivables on equipment they have leased out.  Fair point, but I do not think the market is missing this given the trading volume in this name.  Those declines in profitability include leasing revenues, so you can't have your cake and eat it too IMO.

Now is the 12.5% FCF yield too high a rate for this "annuity" cash flow? Maybe, maybe not. So they will allocate this FCF towards share buybacks and M&A. So buy it for a decent but not spectacular return I think.