Climb aboard the Xerox transformation

Once synonymous with photocopying, the company is far more relevant and successful today than most on Wall Street realize.

By StreetAuthority Jun 27, 2013 10:37AM
File photo of a Xerox scanner - Source: © Paul Sakuma/AP PhotoBy James Brumley

Sometimes, the best advertising a company can hope for is nothing it could ever actually create for itself. Rather, the most potent marketing tool in the world is inspiring consumers to use that company's name as a verb -- one that is synonymous with what that company does.

For example, Google (GOOG) knew it had made it when people started to say "Google it" as a succinct way of referring to a Web search.

But every now and then, your company's name becoming shorthand for a routine function can turn against you.

Case in point: Xerox (XRX). Back in the 1980s, before computers were common (or crucial) in corporate offices, photocopiers were the centerpiece of recording and sharing company information. That's when the phrase "Xerox it" surfaced, slang for the act of photocopying.
The advents of PCs and cloud storage have significantly quelled the need for high-end photocopiers, and Xerox has fallen from relevancy. Investors have also noticed the demise of Xerox's stature, dismissing the company as yesteryear's investment.

That's a mistake. Xerox has done a poor job of telling its story, but the company is far more relevant -- and profitable -- than the market is giving it credit for.

The new and improved Xerox
Think Xerox is just a photocopier manufacturer? Guess again.

Mass-transit ticketing systems, digital printing presses, packaging printers, wide-format scanners and digital document management systems are all part of Xerox's current (and relevant) menu of products. Xerox still makes photocopiers and personal printers, too, but those products are now a minority part of its business mix. Most of Xerox's top line is now driven by services.
In the first quarter of this year, Xerox generated $2.92 billion in service sales. That's 55% of the total revenue mix, up from 51% in the first quarter of 2012. Conversely, product sales and leasing revenue fell to $2.14 billion, or 40% of the company's top line for the first quarter. That's down from 43% in the first quarter of 2012.

A pessimist could note that last quarter's total sales fell 3% on a year-over-year basis, or that revenue was down nearly 1% last year, to $22.4 million. Neither point paints a particularly encouraging picture. But what the numbers alone don't explain is that Xerox has only recently made its full foray into digital document management and related services.

Take the company's e-discovery business line as an example. The acquisition of Lateral Data last year greatly expanded Xerox's capabilities in the e-discovery industry -- a rapidly growing arena for the legal industry. E-discovery gives law firms the tools and framework needed to manage and share the massive amounts of digital data often used in today's court cases. The e-discovery service and software market is projected by some to be worth $9.8 billion by 2017, up 96% from last year.

In early June, Xerox acquired e-learning outfit LearnSomething, which serves the pharmaceutical and packaged goods industry. LearnSomething's software quickly and efficiently delivers information to remote workers. But, under the care of Xerox, LearnSomething could become a much more potent tool.

And Xerox has many more new revenue-bearing tools on the way, if not already under its umbrella.

Value galore
While revenue growth stagnated last year (and earnings actually slumped a little), bear in mind that 2012 was largely a retooling year in which Xerox fostered a more intense focus on its higher-margin service businesses. The company's top line isn't expected to grow much this year either; analysts forecast $22.37 billion in sales in 2013 and $22.54 billion in 2014.

So what, pray tell, makes Xerox such a great investment?

Answer: The stock is cheap relative to earnings, which are expected to grow significantly even if revenues don't.

The latest analyst estimates say per-share profits are on pace to grow from $1.03 in 2012 to $1.10 this year to $1.18 next year. That's a growth rate of "only" 7% for this year and next year. But bear in mind that Xerox has a history of beating estimates. In fact, the company has topped earnings estimates in nine of its past 13 quarters.

When it's all said and done, the trailing price-to-earnings (P/E) ratio of 10 is low enough to be considered a bargain as is. Xerox's expected 2014 P/E of 7.8, however, is about as much of a bargain as an investor could hope for, especially knowing shares of competitors like International Business Machines (IBM) and Canon (CAJ) are priced at P/E ratios of 13.5 and 15, respectively.

Risks to consider
: Although the company is delivering a top-notch service or product in its key markets, many consumers -- not to mention investors -- don't realize Xerox does so much more than just photocopiers now. Other companies will have an easier time leveraging their brands while Xerox continues to reposition its brand name and image.

Action to take
:Xerox may be undervalued, but the market's seeing it like a value stock, and that's not apt to change anytime soon. Investors dreaming of triple-digit gains in just a few months may be disappointed. But for patient value-seeking investors, Xerox shares could justify up to a 30% gain within the foreseeable future.

James Brumley does not personally hold positions in any securities mentioned in this article.
StreetAuthority does not hold positions in any securities mentioned in this article.

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The Xerox transformation is all about outsourcing and offshoring jobs through ACS and HCL, or contracts with no benefits.
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