Quality tech bargains: Cisco and Xerox

by J. Royden Ward, editor Cabot Benjamin Graham Value Letter

For several months, pundits have been predicting that a stock market correction will push stock prices lower. Regardless, I know that my portfolio should be filled with high-quality undervalued companies that will perform just fine through thick and thin.

Two such companies are Oracle (ORCL), the world’s leading supplier of information management software and Xerox (XRX), a technology leader in office equipment.

Xerox provides document equipment such as printing and publishing systems; digital copiers; laser and solid ink printers; fax machines; and digital multifunctional devices, which can print, copy, scan and fax.

Xerox’s acquisition of Affiliated Computer Services in 2010 more than doubled the company’s size and added a steady income stream from long-term service contracts.

Operating efficiencies and cross-selling opportunities, especially overseas, are resulting in a brighter outlook for the new Xerox.

Xerox’s printing operations aim to capitalize on a shift in the document industry away from older copiers.

The change to digital technology, a transition to color and a move to the company’s exclusive (and less expensive) solid-ink ColorCubes bodes well for future sales. I foresee EPS of 1.01 during the next 12 months, 10% higher than a year ago.

XRX shares sell at 8.9 times current EPS, which is a bargain for a company with accelerating sales and earnings growth.

The dividend yield of 2.1% is a plus. The company’s new technologies and recent acquisitions add a needed spark to a company that has endured several transformations. XRX’s stock price will likely reach my Minimum Sell Price of 14.39 within one to two years.

Oracle develops, manufactures, markets and distributes computer software which helps corporations manage and grow their businesses.

As a result of several major acquisitions during the past five years, Oracle offers customers more fully integrated products and services than ever before.

And with the acquisition of Sun Microsystems in January 2010, Oracle is now selling hardware products and services, which include computer server and storage products.

Software maintenance and upgrades are a major part of Oracle’s business and are providing strong revenue growth with high profi t margins.  

Product diversification and expansion into faster growing foreign markets are also helping Oracle meet growth objectives despite weak economic conditions.

New software products aimed at adding speed and software integration to customers’ computer systems will spur further growth in 2012 and beyond. Management’s 2009 restructuring plan to cut costs will provide a boost to earnings growth.

Oracle shares have languished during the past year and now sell at just 11.1-times forward 12-month EPS, which is noticeably lower than many technology stocks.  

I expect sales to increase 12% and EPS to rise 11% during the next 12 months. However, business should then accelerate in future years. Now is an excellent time to buy Oracle shares while the stock price is depressed.

Learn more about this financial newsletter at J. Royden Ward's Cabot Benjamin Graham Value Letter.

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