Is Xerox a bargain or a bankruptcy candidate? At 4x Free Cash Flow, the market is screaming "Bankruptcy".
But the market is missing the nuance. A "Value Trap" is a company where the fundamentals deteriorate faster than the price falls.
Xerox's fundamentals are deteriorating, yes. Revenue is down 32%. BUT, the price has fallen faster. And crucially, the cash flow has remained positive.
The "Melting Ice Cube" Math
If you buy an ice cube for $1, and it melts 10% a year, but it gives you $0.20 of water every year...
- Year 1: Paid $1.00. Got $0.20. (cube is 90%)
- Year 2: Got $0.20. (cube is 81%)
- Year 3: Got $0.20. (cube is 73%)
- Year 5: You have your $1.00 back. You still have 60% of a cube.
Xerox is this ice cube. The risk isn't the melting (that's priced in). The risk is the management using that $0.20 to buy a heater (Growth Ventures) instead of giving it to you.
In Part 2, we discuss the Moat that keeps the water flowing.