By Ryan C. Fuhrmann
"At first glance, recent financial results from document publishing giant Xerox (NYSE:XRX) appeared as putrid as those of other companies that have struggled to navigate challenging global economic conditions. Digging beneath the surface, however, reveals that Xerox's underlying potential to generate cash flow has been masked by its dismal profitability reports.
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However, Xerox is holding up much better than its income statement indicates. Full year 2008 operating cash flow totaled $1.7 billion (when funds used to settle the one-time litigation and other charges are added back). Operating cash flow for 2007 totaled $1.9 billion. Subtract CAPEX, and last year's free cash flow (FCF) totaled approximately $1.55 per share and returns on invested capital remained firmly in the double digits.
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Bottom Line
There is little question that Xerox's outlook remains uncertain, given that it depends on a recovery in business spending. Further deterioration in demand could lead to more restructuring charges, while a fairly significant debt load could become overly cumbersome should the company have trouble refinancing debt coming due. Management allayed liquidity concerns during the quarterly results conference call, boasting that the company has "no requirement to go to capital markets unless we want to and we can pay down if we choose to the whole $1.6 billion of debt due this year." And, at under five times trailing FCF, plenty of downside protection appears to be built into the shares already. (Knowing what a company's financial statements mean will help you to analyze your investments. Learn more in Breaking Down The Balance Sheet.)
Now I'm just a printer, no Wall Street Genius, but this sounds about right to me. Plus I think I heard today that new housing starts were up 6.8% instead of the 0% predicted by the geniuses on Wall Street. Besides, I really like "document publishing giant" instead of "office copy business machines blablablablabla...
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