How the mighty can fall. But will this giant rise again?
Xerox (NYSE:XRX), once one of the bluest of the blue chips, has had nothing but trouble during the last few years, starting with market upheaval, brutal competition, drifting financials, and accounting scandals. The scandal is behind it now, however, and only scathing competition and volatile financials remain.
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 (NYSE:HPQ) and Canon (NYSE:CAJ) are several times larger than Xerox by market cap, but in its quarter three conference call (summary courtesy of CCBN StreetEvents), Xerox said equipment sales are up in key markets, leading to market share gains.
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.
Interested in the possibility? Talk about Xerox with others in the Fool Community . (Jeff Fischer does not own shares in companies mentioned.)
