In recent years, Xerox (NYSE:XRX), traditionally known as a purveyor of copiers, printers and other related services, has been aggressively expanding its business process outsourcing activities. Given the growth that rivals have found in the space, Xerox appears to be on the right track. But for this year, trends look anemic.

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First Quarter Recap
Revenues advanced 1% to $5.5 billion and product sales fell 5% to $1.6 billion, or nearly 30% of total sales. Service revenue, which includes outsourcing and rental sources, rose 4% to account for the vast majority of the top line at more than 68%. Finance income made up the remaining small amount and fell 9%. Xerox also breaks its revenues up between services and technology. It reported solid service (outsourcing activities related to business processing, documents and information technology) growth of 9.2% to $2.8 billion but a 6.3% decline in technology (the sale of products and supplies revenue to $2.3 billion. Profits in each segment declined slightly).

Total pre-tax income fell 11% to $313 million. A drop in tax expenses tempered the net income decline a bit as the bottom line fell 4% to $269 million. However, share buybacks helped keep earnings per diluted share flat at 19 cents.

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Outlook and Valuation
For the full year, Xerox expects to report between 97 cents and $1.03 in earnings per share. Backing out restructuring items, it expects a range of $1.12 and $1.18 per share. It is guiding operating cash flow in a range of $2 billion to $2.3 billion. Analysts currently project a very modest sales growth of 1.6% and total sales of nearly $23 billion.

With a current share price of $7.88, Xerox trades at a forward P/E of only about 6.43.

The Bottom Line
For all of 2011, Xerox generated an operating cash flow of about $2 billion and an impressive free cash flow level of $1.5 billion, or just over $1 per share. This suggests that, along with sales, free cash flow growth will be minimal this year.

Xerox is pursuing a business process by outsourcing growth that firms including Accenture (NYSE:ACN), Infosys (Nasdaq:INFY) and Wipro (NYSE:WIT) have successfully capitalized on. The payroll processing duopoly of Paychex (Nasdaq:PAYX) and Automatic Data Processing (Nasdaq:ADP) have also been looking to human resources BPO for growth. This suggests that Xerox is taking the right approach, but the stock will likely continue to trade at a low level until more tangible signs of both sales and profit growth appear.

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.