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It wasn't so long ago that Xerox (XRX) had no place to go but up -- or into Chapter 11. As accounting problems haunted the company and debt mounted, Xerox stock lost more than 80% of its value before CEO Anne M. Mulcahy took the helm in August, 2001. She had to serve as both chief financial officer and chief exec in her first year because Xerox' future was so murky it couldn't attract a high-quality candidate for the CFO job.

Today, all that's history for the venerated company whose invention of the photocopier changed the 20th century workplace. Despite a sluggish market for office products and fierce competition from the likes of rivals Canon (CAJ) and Ricoh (RICOY), few doubt anymore that Xerox has turned the corner. It not only has cleaned up its balance sheet, but it's expanding its most profitable businesses again. In the fourth quarter of 2003, sales of digital office copiers, digital copiers for commercial printers and high volume industries, and services grew 10%. More encouraging, 60% of Xerox' equipment sales came from new products introduced in the previous two years.

MIXED OPINIONS. On Apr. 23, Xerox will report first-quarter earnings that are expected to signal solid growth for 2004, with projections of total sales up slightly to $16 billion from $15.7 billion in 2003, and net income up 85%, to $665 million from $360 million, according to Standard & Poors.

No longer does Mulcahy have to perform two jobs, either. Xerox has brought on Lawrence A. Zimmerman, formerly of IBM (IBM), as its CFO.

The question for investors is whether it's time to bank on Xerox' future again. Opinions on the Street remain mixed. Industry analyst Shannon Cross of Cross Research is firmly in the pro-Xerox camp. She rates the stock a buy in her reports, citing strong growth in the profitable color-copying business, plus improvements in Xerox' product lines and balance sheet. She thinks the shares could still rise to $18 this year from the current price of around $14.40 a share.

RETOOLED SALES PITCH. Yet, the stock has already bounced up almost 30% over the last year, and some analysts think Xerox now lives in a dangerous neighborhood of cutthroat competition. S&P's Richard Stice, for one, worries that customers aren't buying enough office equipment and what they do buy is so hotly contested by competitors as to be under sharp price pressure. "There's not huge upside," he says. Stice rates the stock hold.

Few people know the combat of this market as well as Mulcahy, who started out her 28-year career as a field sales representative at Xerox. She has smartly retooled her pitch to jibe with customers' tight purse strings, promoting Xerox products for their value and economy.

Gone are the days when Xerox demanded a steep premium for its every copier. Today it's pitching its skills at helping customers save money. Mulcahy, who estimates she's on the road 70% to 75% of the time, makes it a point of honor to personally knock on doors of big customers to argue her proposition. "I spend a lot of time talking to CEOs, asking 'do you have any idea what you're spending on documents today?'" she says. "It's huge."

FIERCE COMPETITORS. Xerox estimates that its customers spend an average of 5% of revenues on document processing, a figure Mulcahy calls "conservative." So three years ago, Xerox formed a division called Xerox Global Services, which today has 1,000 consultants working with clients on everything from hosting their documents to reengineering how they create, store, and retrieve documents.

The problem is this is the stomping ground of even more fearsome competitors. It's not just Canon and Ricoh trying to take a slice of this pie, IBM (IBM), EDS (EDS), and Hewlett-Packard (HPQ) are also fighting for the market. But unlike the IBM and EDS style of broad-based information consulting, Xerox is firmly focused on documents, an approach it thinks can set it apart.

Mulcahy doesn't dispute that she faces a big challenge. On every deal, she acknowledges, three or four competitors are bidding, too. But Xerox has scored some big wins of late, including new contracts with Office Depot (ODP), Microsoft (MSFT), and United Technologies (UTX).

The CEO knows she'll have to keep winning names like that to meet her next challenge. "We have to deliver on growth," she says. "We didn't do all this just to be mediocre." Investors who place their bets with Xerox are trusting her to follow through. By Nanette Byrnes in New York


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