Steve Gallo alerted me to an article on recent Barrons on the new Xerox
and the new CEO, "our" Jeff Jacobson. Thanks Steve
IN AN INTERVIEW with Barron’s, CEO Jacobson, who previously led the company’s technology-equipment business, isn’t promising miracles. The slimmed-down Xerox is expected to see revenue fall about 5% this year, to $10.2 billion, and earnings decline 3%, to $913 million, or 85 cents a share. Jacobson doesn’t expect revenue growth until 2020, and then only if Xerox can get 50% of sales from “growth” markets, up from just 37% now.
One attractive segment is networked printer systems, through which Xerox installs and maintains all of the printers in an office, often collecting recurring lease revenue. That leads to more annuity-like purchases of items like toner and paper as well as maintenance, which together kick in 75% of Xerox’s revenue.
It will need more successful products to kick-start growth. Among the 29 slated launches, Xerox is introducing a new A4 multifunction printer, whose trim size and lower price are aimed at small and medium-size companies. It’s also investing in smart packaging that features low-cost printed memory that can authenticate a brand or the condition of the product inside, capabilities appealing to food and pharmaceutical companies.
Credited with producing, but not capitalizing on, the first home computer, Xerox is “still one of the top 20 patent-producing firms in the world,” as Jacobson notes.
Xerox must be relentless in trimming costs. Although it hasn’t specified a job-reduction target for 2017, it eliminated 4,800 positions in 2016. Already, it has beaten its first-year goal of $500 million in cost reductions by $50 million, and has a target of $600 million this year. That should help margins. Xerox’s aim this year for adjusted operating margins is 12.5% to 13.5%, versus 12.5% in 2016.
The company’s plan is to return at least 50% of free cash to investors. After paying its substantial dividend, it should have free cash flow of $145 million to $345 million in 2017. Xerox former Chief Financial Officer Leslie Varon has said that investors should expect Xerox to begin buying back stock by 2018.
Xerox shareholders would be very happy if it can emulate HP Inc.’s stock performance. Those shares have risen 42%, to $17.30, since the split, while its multiple has improved about four turns, to roughly 10 times 2018 earnings. Xerox now trades at a multiple of 8.6 times 2017 earnings.
ValueWorks’ Lemonides says that investors have put a $7 billion stock market valuation on a company that generates $10 billion in revenue and $500 million to $700 million in total free cash flow. “It’s a compelling risk/reward proposition,” he says. Assuming that Xerox can keep its turnaround on track, Lemonides thinks that it can trade at 13 to 16 times earnings in the next two years.
For sure, Xerox has its work cut out for it, with declining sales in the large enterprise printer and copier markets.
But investors are getting cheap shares and a good dividend from a large, profitable tech outfit with an interesting pipeline. Another comfort: Icahn remains Xerox’s biggest holder, with 10% of the stock, and one of his representatives sits on its board. That should keep management focused on investors.
