Xerox (XRX): Piper Jaffray's Top Pick in Business Services

Piper Jaffray analyst, George Tong, believes that Xerox (NYSE: XRX) transformation from a document technology provider to an outsourcing services leader serves as a powerful catalyst for the shares and sees upside of 40% to current levels. The combination of streamlining underperforming businesses, shifting to a business services model and a leverage driven accelerated buyback program should drive outperformance.

Xerox shares have underperformed in 2015 due to execution difficulties in its government healthcare segment, leading to elevated contract implementation costs and services margin compression. We believe the current strategic portfolio review will stabilize and improve operating performance. The most value-creating strategic option is divesting services units with below-average growth and margins, yielding an improved financial profile, de-risked operating outlook and multiple expansion in the remaining services units.

The company’s recent strategic portfolio and capital allocation review, along with Icahn’s involvement, has the potential to unlock value for the company by increasing management's focus, improving execution, raising profitability, and ultimately driving a positive re-rating of the shares.

Xerox has increased its services mix from 23% of total revenue in 2009 to 57% today and the analyst expects it to be greater than 60% by 2017.

Additionally, a leverage-financed accelerated buyback of undervalued shares will enhance returns.

No change to Overweight rating or $15 PT.

For an analyst ratings summary and ratings history on Xerox click here. For more ratings news on Xerox click here.

Shares of Xerox closed at $10.70 yesterday.

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