In this article, let's take a look at Xerox Corporation (XRX), a $11.73 billion market cap company, which is a media and entertainment conglomerate that has diversified global operations intheme parks, filmed entertainment, television broadcasting and consumer products.

Bullish sentiments

Ray Dalio (Trades, Portfolio) initiated a new position in Xerox with 311,388 shares. Ken Griffin further increased his position in the stock through Citadel Investment Group by 1802% to $13.1 million in the company's latest filing. Hedge fund manager Israel Englander remains bullish on the company as evidenced by itsincreased position in the company's shares.

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Cliff Asness and Joel Greenblatt (Trades, Portfolio) both increased their stakes in Xerox by 53% and 51.5%, respectively. Asness' stake is now worth $66.8 million and Greenblatt's is now valued at $63.25 million. Other hedge fund managers who have taken long positions were Paul Tudor Jones (Trades, Portfolio) and David Dreman (Trades, Portfolio), increasing their positions by 576.5% and 76.3%, respectively.

The stock has a negative return of 23% in a year-to-date basis, so why these prominent investors have taken long positions?

Analysis of revenues

Revenue was below analysts' expectations. Among the reasons, we can find the exchange rate effect is a primary reason. With the actual scenario of weaker foreign currencies against the U.S. dollar, the phenomenon affected negatively to "outside operations." We must not forget that Xerox is a firm operating in more than 160 countries and derived about one-third of its revenues from Europe and other areas. Other reasons can be found when looking at its lower printer sales and higher costs.The latter impacted in an adverse way in margins. Gross margin fell by 0.3% to 31.2% and operating margin was down 1.1% year over year, principally due to the increase in costs associated with regulation issues.

Total revenue decreased by 6.3% (or 2% in constant currency) to $4.47 billion in the first quarter, below analysts' average estimate of $4.56 billion. On a per-share and excluding the non-recurring items, Xerox earned $0.21, in line with analysts' expectations but below $0.26 per share in the year-earlier quarter.

The services business represents more than a half of total revenue with 56% and so the main segment contributing to its revenue. Revenue from this segment was $2.5 billion, down 3% (or up 1% in constant currency). The margin was 7.5%, down 1.1 percentage points, because of higher costs in the legacy Health Enterprise platform implementations.

The Document Technology business reached $1.8 billion in revenue, down 10% (or 6% in constant currency). The margin was 11.1%, down 1.1 percentage points as a result of increased pension expense.

"Our earnings are in line with the guidance we provided. ... Results in Document Technology, which included the increased impact from foreign currency, largely met our expectations. Several of our Services businesses performed well, but overall Services segment results fell short of our expectations driven by higher implementation costs in certain Health Enterprise platform accounts," said Ursula Burns, Xerox chairman and chief executive officer.

With Xerox facing secular declines in its core copier/printer business, the company charted a new path and tripled the size of its services business by acquiring ACS in early 2010. While this deal was criticized by some, today we view Xerox as a leading service provider for back-office business processes and health-care solutions. This is an important market position to be in, because we view services as a key growth driver for the firm and one that management believes can represent two thirds of revenue by 2017, up from 56% at the end of first-quarter 2015.

The company continues to expect to use its strong free cash flow and anticipated proceeds from the pending ITO divestiture to repurchase up to $1 billion in shares this year, return approximately $300 million to shareholders in dividends, and to spend up to $900 million on acquisitions.

Shareholder returns

The company maintains $1.7 to $1.9B in cash flow from operations. Further, it will repurchase $1B, while paying dividends around $300M and $900 for future acquisitions.

The board of directors has recently declared a quarterly cash dividend of $0.07 per share on Xerox common stock, currently yielding 2.5%.

Relative valuation

In terms of valuation, the stock sells at a trailing P/E of 13.94x, trading at a discount compared to an average of 25.6x for the industry. To use another metric, its price-to-book ratio of 1.16x indicates a discount versus the industry average of 2.83x while the price-to-sales ratio of 0.66x is below the industry average of 2.46x. This metrics indicate that the stock is relatively undervalued.

Final comment

Xerox is the leading service provider for back-office business processes and health-care solutions, operating in the aforementioned segments, which are having some contractions. Although the company is shifting to a new business model and expects about two-thirds of sales by 2017 in the business services segment, I think it is time to wait to take a long positions in this stock.

When a stock price drops much in the market I think it can be a good entry point. Unfortunately, I continue thinking this is not the right moment to bet on this stock. As we have seen in a previous article, Xerox has entered into promising regions outside the U.S., but a weaker currency scenario has become a major concern.

Disclosure: Omar Venerio holds no position in any stocks mentioned

This article first appeared on GuruFocus.

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