bmichaud

LTM EBITDA margin has improved every quarter since 12/31/2009 before dipping this latest quarter (the ACS purchase was consummated in early 2010), while gross profit margin has declined every quarter. Xerox said this specific phenomenon, i.e. higher operating margins/lower gross margins, was to be expected as a result of a shift in revenue mix to services from hardware. And FWIW, return on capital is materially higher than it was at 12/31/2009 despite lumpy quarter-to-quarter figures. Please see attached. Xerox_Corp_NYSE_XRX_Financials_Ratios.xls

Is it a dying business? Kodak in 5 years? Not arguing, just curious what you think the outlook is... What percentage of Xerox's contract base is up for renewal every year? 20%? Assuming a 15% loss rate, that means it has to fight to replace 3% of its revenue base on an annual basis. If it's 10%, then annual revenue decline is 1.5%. For a merely "good" business, this is not to be unexpected. Oil, cable and phone companies all have annual decline or churn rates that must be replaced at a particular cost - thus they are not valued at a 15 or 20 PE. Put it this way - I'd much rather have Xerox at 2 times debt to EBITDA than a Kroger, Safeway, Glacier Media or Salem Communications.

This was actually due to the ramping up of recent large contract signings. Interesting. Wonder if the effect of declining equipment revenue has anything to do with this... Haven't heard this. My understanding is Xerox is being quite aggressive in integrating both legacy Xerox product/service offerings with ACS as well as with tuck-in acquisitions. Even taking on an extra $2.7B and raising the dividend, FCF available to pay down debt would be around $800MM per year, so the additional debt could be paid off relatively quickly. Don't forget that there is over $1 billion of cash currently on the balance sheet, which is not taken into account when I look at current leverage ratios.

I'll refer to what I said: I don't think a low-growth company such as XRX will be as highly rewarded over time by returning capital primarily via buybacks. A higher payout that grows on an absolute and per-share basis, IMO will warrant a higher multiple. Rarely does a company get rewarded like Autozone or Autonation for their buyback program....look at XOM, Best Buy, HPQ, NFLX. I think Seagate is a great model for XRX - they had a massive cash hoard and annual cash flows, so they did large BB program AND raised the dividend. One could argue the better option would have been straight buybacks - but a big fat dividend yield has a funny way of enticing investors, like it or not. Sitting around a table trying to convince portfolio managers that a buyback yield is just as good if not better than a dividend is VERY difficult. You put something in front of them with a 9% yield and keyboards would be SMOKING.

I submitted an article over at Gurufocus outlining what I think Xerox management should do to boost per share value and close the valuation gap. Would love feedback from the board and/or for larger investors to get involved! http://www.gurufocus.com/news/178110/why-xerox-should-recapitalize-and-boost-its-dividend Right up front I want to disclose that I own Xerox and am thus talking my book. The investment thesis for Xerox is well known throughout the investment community, as the stock has shown up in several well known hedge fund portfolios and recently won the “Best Idea” contest at the Sohn Conference, so I will only briefly outline – the ACS acquisition transformed Xerox into a service company with stable, annuity-like revenue, it generates approximately $1.6 billion of free cash flow, it sells for less than 7.00 times FCF at current prices and is committed to repurchasing roughly $1 billion worth of stock per annum over the next several years. While the investment thesis is attractive on a stand-alone basis, I believe the “low-growth” nature of the business and the paltry dividend yield leave the stock in “equity mandate no-man’s land” with the potential for an extended period of “dead money”. “Growth” investors are uninspired and “value” investors receive little in the way of current yield – while the buyback yield is significant and certainly benefits from the current undervaluation, I believe a more balanced policy of returning capital will result in a higher multiple over time as an attractive and growing dividend attracts a long-term, stable shareholder base. In order to take advantage of the current undervaluation, transform the shareholder base and close the valuation gap, I would propose the following three-part plan. Allow me to explain. In summary, I believe Xerox should 1) boost its “core” debt from 1.14 times to 2.00 times LTM EBITDA by issuing up to $2.7 billion of additional debt, 2) initiate a $2.7 billion Dutch tender offer at $7.50 per share in order to retire 360 million shares and 3) boost its dividend from $250 to $735 million per annum. The Dutch tender offer would immediately boost per share intrinsic value by more than 20%, the more balanced payout policy would transform the shareholder base and the 9.2% post-tender offer dividend yield would catalyze a closing of the valuation gap as yield-starved investors drive the yield down to 5% or less. As of 1Q12, Xerox had total debt outstanding of $9.6 billion, or 3.04 times LTM EBITDA. $6 billion represents “financing” debt backed by high-quality financing receivables, while $3.6 billion is considered “core” debt. At 1.14 times LTM EBITDA, I believe Xerox is under-leveraged from a “core” debt perspective, a belief underscored by Xerox’s recent $500 million issuance of 5-year unsecured debt at a pre-tax cost of 2.95%. Issuing $2.7 billion of additional debt would bring the “core” debt ratio up to a modest 2.00 times LTM EBITDA. I estimate 2012 free cash flow to equity holders to be approximately $1.6 billion, or $1.12 per share based on $2.2 billion of management-guided operating cash flow, $600 million of capital & acquisition spending and weighted-average, fully-diluted shares outstanding of 1.427 billion. Assuming a conservative 10 times fair value PE multiple, Xerox is currently worth approximately $11.20 per share. A $2.7 billion Dutch tender offer at $7.50 per share would reduce shares outstanding by 360 million shares, boosting per share FCF to $1.38 (assuming a 6% pre-tax cost of debt and a 20% tax rate). The post-tender offer fair value would thus rise to $13.80, more than 20% higher than the current estimated fair value. Post-tender offer, the current annual dividend of $250 million would rise from $.18 to $.23 per share for a dividend yield of 3.1% (versus 2.3% pre-tender offer). With its annuity-like cash flow profile however, Xerox is more than capable of handling a 50% payout ratio, or an annual dividend rate of $.69 per share – at a post-tender offer price of $7.50, the dividend yield would rise to 9.2%. To say the least, I do not believe a 9.2% dividend would last long – perhaps a new, dividend-seeking investor base drives it down to 5%? The upside speaks for itself – a 5% yield means a $13.80 stock price, while a 4% yield means a $17.00 stock price. While it is a neat exercise to measure potential “downside”, since stock prices are simply a reflection of the collective investor mood at a moment in time, and the general mood at the moment is supremely negative as a result of the developed world’s inability to get its fiscal house in order, I will not venture a guess as to how low Xerox’s stock price could fall in the event of a large-scale market decline. All I will say is that I am quite confident the risk of permanent impairment from current levels is sufficiently low to warrant a full position. I do not have the capital to push for such a plan, but as Jeff Saut often says, “Good things happen to cheap stocks”. A prolonged period of stock price stagnation particularly in the face a robust buyback program will no doubt incite shareholder action.

As of June 30, 2008, Countrywide had $86 billion of total debt out including TPS - so not entirely sure where $100B comes from since it hasn't had that much since the acquisition. If you look at page 210 of the annual report (see: http://media.corporate-ir.net/Media_Files/IROL/71/71595/AR2011.pdf), long-term debt is broken down as follows: Bank of America Corporation $181.4 billion Merrill Lynch $104.1 Bank of America N.A. and Other Subs $14.9 Unless Countrywide is somehow included in BAC Corporation, I'm assuming it is included in "Other Subs".

twa, Assuming this is a realistic risk, how would you explain the complete lack of disclosure regarding this issue in the two most recent 10-Q's and the last 10-K? The probability of Whalen's scenario coming to pass is beyond my competence to assess. What I am laying out is a theoretical basis for what he thinks is a credible risk. In other words, if he isn't completely out to lunch, this is how his scenario could play out, given the legal constraints. Liquidity at the Holdco is apparently very important to management that raised capital at about the current price from Uncle Warren. If management disputes a legal claim, I don't thank they have to set up a reserve for it. Also, I don't think the banks have to mark their bad assets strictly to market. These are just thoughts. I don't know what's realistic. Whalen says BAC's subs other than countrywide and the debt issued by it are solvent. He's not a short seller with an axe to grind. We know about the legal issues. What about the countrywide debt? How much is outstanding, including any quasi debt like TPS? When does it have to be paid off? According to Capital IQ, there is less than $10 billion of Countrywide debt out - $2 billion is due June 2012 and the next $1 billion tranche isn't due until 2016. This includes roughly $2 billion of TPS.

Something strikes me as odd this time around the EZ merry-go-'round.... There is a huge "jog" on the banks currently underway, projected deficits are rising, the LTRO effect is exhausted, China is slowing down, the US is slowing down and Greece is as close as ever to a "disorderly exit", yet....EZ bond yields are really not that close to where they were back at the lows of last year. If Spain is in such trouble and we're about to face Lehman 2.0, why are yields not blowing out? (I'm not looking at spreads here, which are garbage - absolute yields are what matters...) Perhaps the general "risk-on" market is pricing in an ECB backstop and will subsequently be surprised if it comes later rather than sooner if at all.

To really twist the knife on value investing and our focus on price...what about companies that show very low returns on capital because they're sinking all available cash into growth, leaning into investments in capital and expenses (marketing, personnel, R&D, etc.). It's hard to normalize their earnings to get a sense for how profitable they could be if they slowed down their growth. But when these unprofitable companies (and therefore low ROIC and negative P/E) have a competitive advantage that protects them from competitors while they grow, they can be some of the most exciting opportunities. Enter stage left: Amazon I wish I could normalize this company because I think the moat is huge - just cant quite get there....

Under the scenario Moore outlined, which has been proven to be more than a possibility by the LTRO program, why would that be anything less than at least a floor under risk assets if a "disorderly breakup" is taken off the table? Perhaps Sanjeev you are right that we get a decline not quite as bad as 2008/2009 before Moore's scenario comes to fruition....

The business has to have: 1. Huge returns on capital - i.e. can grow at or above GDP while retaining little if any earnings 2. Pricing power 3. Growth opportunities available - I want See's Candy but I want it to expand out of California (what a waste of a wonderful business) 4. Preferably a royalty-based business with tremendous operating leverage in addition to characteristics 1-3 I can't find 5 of these, so I'll put my favorite business/company/stock in the world up as my only pick: McDonalds 1. Royalty-based business with phenomenal operating leverage 2. Wonderful platform of growth opportunities via remodeling, product inovation, emerging markets 3. Pricing power 4. Ability to grow the topline at 6%, EBIT at 8% while paying out 100% of earnings.

As Moore has discussed many times here, and was made abundantly clear with the ECB LTRO program, central banks always and forever will resort to printing money. Germany has what only 2 votes out of 27 (can't remember off the top of my head)? They're all talk. They know they benefit the most out of everyone from the Euro staying together. Printing is going to happen. Moore, what are your thoughts?

Interesting - out of curiosity, do you calculate the effect of those puts in your net long calc? Do they hedge a material portion of NAV?

Sanjeev/twa time horizon for holding cash = ~1 year WEB/CM = 100 years You can't compare the two. Makes no sense.

That's what makes the market. It's all relative to what prices u paid. Banks are selling at 7x PE, energy selling at 2-3x cash flow (some sell at less than half of NAV). Big Pharm selling at less than 10 P/E. All yielding well above Treasury Real Inflation rate way over 2-3% as posted. I think the last month has proven how even undervalued securities get obliterated in a broad decline - hence the wisdom of Sanjeev's move to go to 50% cash...

Huge amount of money on the sideline. - money on the sidelines stays on the sidelines because someone always has to hold that money Many retail investors are out of the market.. - is isn't going to change. Market is being driven by institutional investors being forced into stocks as a result of ZERO alternative options. The biggest economy is on right track. EU is still growing. - US is slowing down (ECRI call materializing before our eyes), EZ entering deflationary spiral. Low interest rate, lower energy cost. Recovery in house price. - seems reasonable Well capitalized banks and corps. - US fiscal cliff very much staring US market in the face. Lower deficits = less money available for US consumers to pay down mortgages held by BAC. QE on the trigger. - likely to have muted effect in US. IMO, biggest bullish catalyst for global markets is ECB/Germany getting their head out of their ass and coming to grips with the fact that printing is the only way out of this barring a fiscal union. Tough to be bullish with all of the above.

I'd agree with not seeing -3%, but it was shocking to me to see that the market declined -54% with only a -3% real GDP decline! We're at even lower valuations now, so just from that any decline won't be as bad, but still could be pretty nasty even with just -1% growth.

ECRI came out with its initial recession call on September 30th, 2011 and has updated its call three times since then. Thought I'd aggregate all the videos for those interested.... September 30: http://www.businesscycle.com/news_events/news_details/1472 December 8: http://www.businesscycle.com/news_events/news_details/3105 February 24: http://www.businesscycle.com/news_events/news_details/5051 May 9: http://www.businesscycle.com/news_events/news_details/5093 Common sense would say that given the severity of the last recession the next recession would be a bit more shallow. However, given the deleveraging environment we currently find ourselves in, I wonder if the potential oncoming fiscal contraction coupled with potentially tepid monetary policy (though I would put money on Big Ben holding up his end of the bargain...) doesn't drive us into a post-1937 type recession and subsequent market downturn. In Dalio's in-depth look at deleveragings, he shows the "reflationary" period from 1933 to 1937 led by fiscal deficits and a -10% devaluation of the USD against gold (see page 8 of the PDF), which led to a 324% rise in the S&P 500 from 4.40 on 6/1/1932 to 18.67 on 3/10/1937 for a 5y CAGR of approximately 34% per year. After the 1932-1937 reflationary period, real GDP contracted -3.4% in 1938. The S&P 500 peaked on 3/10/1937 at 18.67 with a Schiller PE of 22.2X (history-to-date Schiller PE was 15.2X at the time) and dropped 54% in almost exactly a year to 8.50 on 3/31/1938 with a Schiller PE of 10.1X. The S&P didn't reach 18 again until 1/10/1946 when it traded at a 14.6X Schiller PE. This is all very rudimentary and largely off the top of my head (except actual data points), but interesting, IMO nonetheless. Perhaps what Fairfax is looking at to a degree? An_In-Depth_Look_At_Deleveragings.pdf

For the most part it's correct to say most rich people in the investment world are rich because they're in the investment business, but... Buffett currently has what a $500mm personal portfolio? That was started from literally $0. Probably one of the greatest investment feats of all time, IMO. Though Ericopoly is gaining :)

Looks like the Fin Times reached out to "blogger" Cullen Roche of pragcap.com to write a piece on modern monetary theory. Very well done IMO... http://www.ft.com/intl/cms/s/0/c53082f8-9543-11e1-ad38-00144feab49a.html#axzz1u6l7ZbBJ

Plan, go read Dalio's Daily Observations here: http://www.bwater.com/home/research--press.aspx Absolutely brilliant.

Ironically I couldn't agree more with this statement. I'm biased b/c I come from a very strong religious background, but particularly regarding the marriage point I think it's spot on. I don't think this is the place to discuss, thus I won't any further, but just wanted to throw it out there that at least someone else agrees with the statement...

Pretty low-volume down day for BAC at around 180mm shares. Encouraging IMO.

My comment was laced with sarcasm 8)

You shouldn't take into account the opinion of such charlatans - they have no idea what they're talking about.