Xerox: Making Progress on the Comeback Path


It may be hard to believe, but Xerox (NYSE:XRX) was once the top tech stock — way back in the 1950s, somewhat akin to what Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) are today. Decades before “Google” became a verb, Xerox was firmly entrenched as a brand that became an action.

Xerox today is a leader in copiers, laser printers and document publishing equipment, but it hardly resembles what it was in its glory days. Now, though, it’s trying to be a comeback kid.

That would be a stretch for investors watching how Xerox has struggled in recent years, but don’t count it out. After a hard drop to a low of $4.1 a share in 2009, the stock can go only a lot higher, according to new Xerox bulls. Yes, it has since climbed to $7.91 a share, but that’s nowhere near the lofty hundreds of dollars it commanded in its heyday. A more relevant comparative price would be its valuation in the 1990s, when Xerox traded in May of 1999 at $61 a share.

So, the younger set may have difficulty imagining how Xerox used to a huge glamor stock during the 1950s, when it was one of the celebrated “Nifty Fifties” at the height of that era’s market boom. No wonder. By 2000s, XRX had come way down to $11 a share. The emergence of the Internet and eventual digitization of documents decimated Xerox’s growth.

In recent years, Chairman and CEO Ursula Burns has been transforming Xerox from a hardware-based company to a service-oriented enterprise. Its acquisition of Affiliated Computer Sciences in 2010 was part of this effort, and the company expects to spend up to $300 million to expand its service operations. It spent some $200 million in acquisitions in 2011.

Sure enough, the transformation into services has stopped the bleeding in Xerox’s sales and earnings. With a strong free cash flow, Xerox has been able to do not only acquisitions but stock buybacks, which has helped boost earnings per share. Analysts expect Xerox to repurchase $1 billion worth of shares in 2012. With a market cap of about $11.2 billion, Xerox has an estimated free cash stash of some $1.8 billion.

Wall Street generally remains unimpressed with Xerox’s rebound, but some investment pros think quite differently, especially after the company’s 2012 first-quarter results, which beat expectations.

“We were pleased to see Xerox broadly deliver solid operational results relative to our expectations” in the first quarter, says Ananda Baruah, technology industry analyst at investment firm Brean Murray Carret, who rates the stock a buy, with a 12-month price target of $10.

Revenues for the 2012 March quarter grew to $5.50 billion vs. $5.45 billion in 2011’s first quarter. Management has reiterated its earnings guidance for 2012 of $1.12 to $1.18 a share. Xerox earned 90 cents a share in 2010, and it pays an attractive dividend yield of 2.1%.

The first-quarter results prompted Baruah to raise his 2012 earnings forecast to $1.16 a share, from $1.15. The consensus Wall Street estimate is $1.13.

With the positive first quarter, “Xerox is off to a solid start” for the year, says Baruah. Investors are now more convinced that Xerox could increase its 2012 revenue growth by 2%, vs. the Street’s estimate of 1%, says the analyst. And earnings are expected to ramp up a 10%-20% growth in 2012, he adds.

Gross margins are also headed higher over the coming quarters of 2012, which Baruah figures should jump to 37% from last year’s 31%. Operating margins are also tracking higher, he says.

All sectors showed positive gains at Xerox, with revenue growth from services better than expected, he notes, calling this “an important signpost for the stock.” Technology revenues of $3.22 billion, which include equipment sales and related services and financing, combined with document outsourcing (which he believes is a true measure of the printing business), were also stronger than expected, says the analyst.

David R. Cohen, analyst at investment research firm Value Line, says Xerox is a “timely stock which offers good appreciation potential over the next three to five years.” Xerox is ranked No. 2 in “timeliness” in Value Line’s stock-grading system.

He notes that the company has the leading market share for digital publishing in the U.S. and Europe, thanks to its robust spending on research and development. Many of the 27 new products that Xerox launched last year had color output capability, says Cohen. He expects the Xerox’s stock price to gain some 13% in both 2012 and 2013.

As Xerox remains a global brand in the worldwide document processing market, its stock should be considered a long-term investment in the fast-moving tech world. And don’t discount the possibility that a larger company will see it as an attractive acquisition target.

As of this writing Gene Marcial didn’t own any securities mentioned here.

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