How the mighty can fall. But will this giant rise again?
In an analyst conference call this morning, Xerox's CEO Anne Mulcahy said she's pleased with the company's market opportunities, but provided 2004 guidance slightly below analysts' expectations. Whether the blame is on Xerox or on optimistic analysts is irrelevant. Disappointment on Wall Street ensued and the media focused on the black eye rather than the half-smile beneath it.
For next year, Xerox projected earnings per share of $0.67 to $0.72. The consensus analyst estimate was $0.73 or $0.74 (depending on your source). For 2005, the company projected strong earnings growth, rising to a range of $0.90 to $1.00 per share, on 5% sales growth. Sales are down modestly this year and expected to be flat in 2004.
Mulcahy said the company has ample growth opportunities, so the focus is on execution and paying down debt. Xerox has $11.8 billion in long-term debt. It should pay it down to $11 billion by year-end, and will keep paying it. Free cash flow is making this easier. Management expects $1.5 billion in free cash flow this year. That puts the company's enterprise value, at $10 per share, at about 11 times expected free cash flow.
Competitors such as Hewlett-Packard
Xerox is a faded giant with improving financials, a situation that turnaround-interested investors might find attractive. Unfortunately, it doesn't offer a dividend while you wait, but at 14 times 2004's expected earnings and nearly 10 times 2005's guess, the stock could provide appreciation of around 50% over the next two years if management executes.