After Rare Upgrade, Is Xerox Becoming Cool Again?

This is a rare event we are seeing today. When was the last time anyone heard about anything great happening at Xerox Corporation (NYSE: XRX)? This document management provider has two positive developments happening at once. That would be hard to imagine if you just thought about Xerox as the good old copier company. That reference also seems to be long ago now.

First is that the stock is hitting a 52-week high. Actually, make that a high not seen since January of 2011. The second great thing is that Standard & Poor’s just upgraded its corporate credit rating. Both of these are probably hard to imagine if you just think back to the days of its office copier days.

What is interesting about the 52-week high is that this high would be even further back if you adjust for dividend payments. Xerox has paid out in excess of $0.50 per share in dividends to shareholders since the start of 2011. It also yields about 2% now.

Monday’s S&P corporate long-term credit rating was raised to “BBB” from “BBB-” and the outlook has moved to “Stable” from “CreditWatch positive” in the call. This upgrade is an important one because it removes Xerox from being on the last notch of investment grade. S&P also raised the short-term credit rating to A-2 from A-3.

S&P had previously changed the Xerox corporate credit rating outlook to “CreditWatch with positive implications” back on November 26. A criteria revision was cited, based upon ratios and adjustments to include surplus cash. The Stable outlook reflects the belief by the ratings agency that Xerox will maintain good free operating cash flows and that it will maintain a consistent capital allocation.

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S&P believes that Xerox will keep cash flows and leverage solidly within the intermediate financial risk profile while still having headroom for what was called “moderate acquisition activity.” S&P also believes that Xerox will maintain a sizable cash balance as surplus cash. The ratings agency even believes that the services segment will support a revenue and earnings base even with expected weakness in document technology operating trends.

It seems hard to imagine that great things are happening at Xerox in this day and age. That being said, apparently Chairman and CEO Ursula Burns and her team are quietly coming back from nowhere. Is it possible that Xerox is becoming cool again? Apparently so, at least as far as investors are concerned.

This S&P upgrade is not an equity upgrade, but it theoretically does support lower borrowing rates and shows better credit metrics for those lending money or doing business with Xerox. Another aspect making the upgrade stand out is that Thomson Reuters is calling for another drop of almost 4% in sales in 2013 followed by only a 0.5% revenue gain in 2014.

Xerox shares were up 2.6% at $11.68 on last look, up from a low of $6.62 in the last year, and with a market cap that is back up to almost $14.4 billion. The consensus price target according to Thomson Reuters is $10.55, and the highest equity analyst price target is up at $13.00.