PREMIUM SEARCH Search by job title, geography and build a list of executive contacts
Even before Xerox' latest woes -- back when it was trading around $20 last summer -- it was known on Wall Street as a "show me" stock. That bit of jargon is reserved for good companies that have gone off course, one can hope, temporarily. Analysts use the term when they still have enough confidence in a company's management and core business to suggest that if it can post a few decent quarters, they'll get behind the stock again.
Now Xerox (
XRX
),is at about $8.50 a share -- and the "show me" era looks like the good old days. At the current price, a few analysts are bold enough to suggest the stock could be an "asset play" (where the market capitalization is less than the price all the underlying assets would fetch if sold off).
But most Xerox watchers are braced for more pain. "These bad times have a tendency to generally get worse," says A.G. Edwards & Sons analyst Shebly Seyrafi. While he thinks the company should be able to avoid bankruptcy, he doesn't see it being successful in its core business "in the next year or so."
As cheap as the stock may seem, the fact is Xerox is far from pulling off a turnaround. Chief Executive Paul A. Allaire has said outright that the copier giant has an unsustainable financial model. He knows Xerox must cut product costs and overhead to once again compete successfully against newly energized competitors such as Canon, which has aggressively taken market share from Xerox in its core office-copier business. But that is easier said than done.
GARAGE SALE? Wall Street was hoping for some bold cost-cutting and cash-raising moves from Xerox on Oct. 24, when the company announced a third-quarter loss of 20 cents per share. Instead, the company said only that it was investigating a series of asset and equity-stake sell-offs that might raise $2 billion to $4 billion -- an approach analyst Jonathan Rosenzweig of Salomon Smith Barney labeled as "too piecemeal." Among those moves is a possible sale of equity in its fabled Palo Alto Research Center (PARC). Yet investors who've looked at the deal question whether Xerox would really be able to sell an equity stake in PARC because the R&D unit doesn't generate any cash.
Nor did the company give any hint whether it would sell its financing arm, Xerox Credit Corp., which analysts say offers the best opportunity to raise cash. Moreover, while Xerox promised on Oct. 24 to cut $1 billion in costs by slashing overhead and trimming more jobs, analysts are also skeptical of the company's ability to carry that out swiftly. They note that Xerox is still trying to complete a massive restructuring from 1998, which was supposed to cut 9,000 jobs, and another cost-cutting program announced in March intended to lop 5,200 more.
One of the issues most critical to Xerox' turnaround is the need to design lower-cost digital copiers to compete with Canon, Rosenzweig says. Yet that kind of product overhaul requires a lot of cash -- something Xerox is extremely short of. Indeed, the company will end this year once again with negative free cash flow -- the third time in the past four years.
TAPPING A LINE. Adding to Xerox' cash problems is the company's worsening credit. In the wake of a number of debt downgrades by rating agencies, Xerox debt barely maintains an investment-grade rating. Now restricted in its ability to issue commercial paper or longer-term debt securities, the company has for the first time had to tap a bank credit line it set up in 1997 with 58 banks as a backstop for its commercial paper program.
The company notified the Securities & Exchange Commission on Oct. 10 that it had tapped into the $7 billion line. The company says it has adequate liquidity, but investors were highly unnerved when Xerox made the announcement. That drove shares down to new lows. While the immediate crisis may be over, Seyrafi believes the credit crunch could resurface.
Some investing pros have made a lot of money buying stocks when investor sentiment was at rock bottom. "There are a lot of bad things going on with the company," says Tom Taulli, a senior analyst at Internet.com who believes the value of all the Xerox businesses may already add up to more than the company's $8 billion market cap. "But they do have some assets that they could wring the value from." He points out that management has strong incentive to boost the share price. Even if the company continues to have bad news, he suggests investors should buy in at a point where the stock price doesn't fall after more bad news.
SELLING MEAT? One bull is Tom Gentile, chief option strategist at Optionetics. He believes buying a long-term option (leaving plenty of time for a turnaround) could have significant upside. Recent volatility in Xerox options prices could be signaling a change in market direction. Plus, he says, "Selling pressure looks to have all but dried up."
Gentile doesn't have much company, however. Morningstar analyst Jay Ritter points out that if the economy slows and corporations delay spending on expensive machinery, improved results could be impossible for Xerox to achieve -- no matter what the company does. At that point, even the value of its high-end copier business could erode. Xerox has "identified some of the low hanging fruit that they are inclined to sell right away," he says. "The question is whether they can get their core business turned around before they have to start selling off the meat and potatoes of their business."
Ritter's advice to investors is to stay away. To be sure, $8 a share seems awfully low for a company with Xerox's brand name and stature. "This is still a very strong company with great technology and great products with a will to return shareholder value," says Xerox spokesman Bill McKee.
Moore writes for Business Week from Greenwich, Conn.
Stone is an associate editor of Business Week Online and covers the markets in our daily Street Wise column.
Questions or comments? Join in the discussion at our Ask Amey Stone interactive forum
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
Printer-Friendly Version
