Citi Upgrades Xerox Due To Cash Build Up, Strategic M&A

Citi issued a industry update highlighting Xerox Corp (NYSE: XRX) based on improving signings and cash build up for accretive M&A. Citi upgraded Xerox from Neutral to Buy and raised its price target from $12.50 to $15.

Analysts Jim Suva, Joe Yoo and Michael Cadiz wrote, "While currency and pension expenses are near term headwinds, we applaud Xerox's efforts to continue their transformation towards a Services company and expect multiple expansion as the company executes on their business transformation initiatives towards margin expansion in their services segment. Moreover the company has divested the IT Outsourcing and has allocated close to $900 million in acquisitions which should generate incremental services revenue growth which is not currently modeled into our estimates. Shareholder return policies and free cash flow yield are very attractive."

After the sale of its IT outsourcing business Citi believes that the company will continue its share reduction program given proceeds from the sale. Operating margins for Xerox are expected to be negatively impacted from currency headwinds and higher pension expenses, partially offset by benefits from lower cost of technology sales. Potential for consolidation in the printer industry given the declining market is another potential positive catalyst.

Shares of Xerox closed Tuesday at $12.96. Shares were up more than 2.5 percent in Wednesday's pre-market session.