Xerox Wobbles on Earnings Warning (Breakfast News) December 13, 1999


Monday, December 13, 1999

"Most of the change we think we see in life/ Is due to truths being in and out of favor."
-- Robert Frost

Xerox Wobbles on Earnings Warning

By Richard McCaffery (TMF Gibson)

Bad news is multiplying like rabbits at Xerox (NYSE: XRX).

The shares took a beating in after-hours trading this weekend after a Friday night announcement that it expects to miss earnings by as much as 40%. The reason: Slack demand due to the year 2000 problem, reorganization glitches, weakness in the Brazilian currency, and a strong U.S. dollar.

Analysts surveyed by First Call/Thomson Financial expected earnings of $0.67, down 21% from $0.84 a year ago. It's the second consecutive quarter the company's prepared investors for a weak quarter, and Xerox shares fell $3 9/16, or about 15%, from its closing price of $23 7/16 Friday.

It's trading at its lowest level in more than two years. Right now it's valued at a little more than two times book value.

Xerox officials said pricing pressures, lower sales in the U.S. and Europe, and an unfavorable product mix -- which usually means the company has products that aren't selling -- also contributed to the expected shortfall. These aren't problems that are solved overnight.

But Rick Thoman, the company's president and chief executive, regards the problems as short term. In fact, he expects earnings will grow significantly in the second half of 2000.

The company is focused on the black and white and color printing markets -- both fast-growing areas -- and Xerox has been successful making major transitions this decade as computers and digital technology changed the landscape. In addition, it's generating more cash from operations this year than last, which is a good sign the reorganization is showing benefits.

Long term, analysts expect the company to grow earnings nearly 15% annually, which seems aggressive considering the size of Xerox and the competition it faces from companies like Hewlett-Packard (NYSE: HWP). Although the stock will probably get a nice pop next year once everyone realizes the Street overreacted, it's hard to picture Xerox growing faster than the market over the next 10 or 20 years. That's not much of an incentive considering the risk involved.

News to Go

High-flying network equipment manufacturer Foundry Networks (Nasdaq: FDRY) announced plans to split its stock two-for-one for all shareholders as of December 20. The stock will start trading on a split-adjusted basis January 10. Foundry just went public September 27 at $25 a share and is up more than 1,000%.

Video retail chain Blockbuster (NYSE: BBI) plans to create three operating divisions to take advantage of its brand, retail base, and customer information segments. The three divisions will be the company's stores, its Internet property and electronic home delivery efforts, and its business solutions group.

Local telecommunications company Bell Atlantic (NYSE: BEL) plans to create a separate business for its Internet service in New York as part of an effort to obtain regulatory approval to offer long distance telephone services in the empire state, according to Bloomberg. Since Bell controls the local wires, the move is meant to convince regulators that competing Internet service providers will get access to Bell's facilities on the same terms as the new unit.

Title insurance company First American Financial (NYSE: FAF) expects to report losses in the fourth quarter and first quarter as declining new orders, seasonal fluctuations, and interest rates hurt profitability. In related news, the company announced plans to repurchase up to 5% of its stock.

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