Xerox May Soon Offer Some Nice Surprises
Imagine that you’d put $100,000 into a blue chip stock in 1980, then forgot about it. Now you look at it again, and after 10 years of stupendous market gains, your stock is worth less --just $77,000.
You’d be angry. You’d want to physically hurt the broker who sold you the stock.
For many long-term shareholders of Xerox Corp., that’s the sad but true story.
Except for a surge in 1987, Xerox barely participated in the 1980s bull market. At $55.125, the stock sells for less today than its high of $71.75 in 1980. Even worse, this is a stock that some folks paid $171 a share to buy in the early 1970s. They’ve been under water ever since.
Xerox isn’t some tiny high-tech company, of course. It remains the grand daddy of copier companies, with $17.6 billion in revenue last year, ranked No. 21 on the Fortune 500--up from No. 38 in 1980.
How a company of such resources could turn out to be such a lousy investment is a complex tale. Now, finally, there are reasons to believe the outlook is changing for the better. Yet Xerox shareholders and Wall Street analysts generally expect almost nothing of this stock. That means a lot of people could be pleasantly shocked.
“The perceptions of this stock now are about as bloodily low as you can get,” said Alex Henderson, analyst at Prudential-Bache Securities.
What happened to Xerox in the ‘80s? First, it spent a fortune investing to keep itself alive in the copier business, in the face of a Japanese onslaught. Xerox had to completely rethink and restructure its business to keep the Japanese from grabbing the entire copier market. Quality and competitiveness became Xerox’s guide words.
By any account, Xerox succeeded magnificently--and without government help, unlike Chrysler and others that fought the Japanese. Today, Xerox machines produce about one-third of the trillion copies the world runs off each year. The rest of the market is split among a myriad of players.
But the cost of staying competitive has been a shrinking profit margin: from a 26% operating profit margin in 1980 to 13% in 1987. Meanwhile, Xerox made a series of blunders in attempting to diversify into other business equipment. And in the mid-80s, Xerox made its most controversial diversification move of all--into finance.
Xerox’s plunge into property and casualty insurance (Crum & Forster in 1983) and investment management (Van Kampen Merritt in ‘84) alienated many analysts. The problem with financial services is that earnings are unpredictable because of the constant potential for big gains--and losses--on investments. Many money managers felt Xerox was out of its league. “We don’t know why they didn’t stick with their basic business of copiers,” laments William Manning, who runs $3.6 billion at Manning & Napier in Rochester, N.Y.
The answer may be that Xerox had no choice, some analysts say. By 1983, Xerox managers knew that while they fought to survive in copiers, the only way to keep the stock from plunging was to maintain the $3-a-share annual cash dividend. And financial services offered the chance of earnings to cover the dividend. It bought time.
That’s been the story since: Xerox has traded like a utility, offering a high dividend but little appreciation potential. At $55.125 now, the $3 dividend means a 5.4% yield. “I’ve held it for the dividend, that’s all,” said Harry Miller, a money manager at USAA Investment in San Antonio. And even on that count, he said, he’s been disappointed that Xerox has refused to raise the payout.
So after 10 years of disappointment, why think anything will change with Xerox? Ty Govatos, a Donaldson, Lufkin & Jenrette Securities analyst who typically shuns press publicity, recently put out a “buy” signal on Xerox. In a report on the stock, Govatos’ optimism focuses on two key points:
* Xerox’s copier profit margins finally appear to be improving, after a decade of declines. The catalysts: A firming, at last, of prices for high-speed machines, and the introduction of Xerox’s 50 Series copier line. Not only has the 50 Series been lauded for its superb quality, but it also was designed by Xerox to provide substantial manufacturing cost savings to the company--on the order of 30% to 50%, Govatos estimates.
The 50 Series has been well received by customers. And if demand stays firm, and copier prices continue to improve, Govatos believes that Xerox’s operating earnings from copiers could hit $7 a share in 1991 or ‘92, finally breaking out of the $4-to-$5 range that is all Xerox has done annually since ’82.
* Beset last month by another disaster in financial services--a huge loss in real estate investments by the firm’s VMS Realty arm--Xerox may finally exit many of its finance businesses, Govatos said. “If so, the elimination of the uncertainty and risk inherent in such operations would be another very potent plus.”
Another important consideration: David Kearns, Xerox’s CEO since 1982, will step down this summer and will hand the reins to President Paul Allaire. Allaire at least offers the chance for a fresh start. What’s this stock really worth? It sold for as much as $85 in 1987. If it just got back to that point, a buyer at $55 would make a good buck. No promises, of course, but Xerox’s incredibly low standing recalls that old adage: “The time to buy something is when no one else wants it.” After the VMS news, analyst Henderson took angry calls. “They said, ‘I’m so disgusted with this stock, I’ll never own it again,’ ” he said. That’s either a very smart view, or Xerox has hit bottom.
Pic ‘N’ Save Fight: Pic ‘N’ Save, the deep-discount retailer that Wednesday found itself the target of a hostile investor group led by raider David Batchelder of La Jolla, may find it hard to beat him.
Thursday, more money managers who own the stock put their support behind Batchelder, at least unofficially. Robert Bacarella, president of $130-million-asset money manager Monetta Financial Services in Wheaton, Ill., said he is “more than happy to give the new group a chance” to run floundering Pic ‘N’ Save. “I don’t like losing money,” said Bacarella, who owns 150,000 shares.
Albert Nicholas, a Milwaukee money manager who runs $2.4 billion and who owned 915,000 shares on Jan. 1, declined to say how many he has left. But he said he is “very disappointed in the company.”
Pic ‘N’ Save stock rose 62.5 cents to $14.125 Thursday in heavy trading. It had been at $10.625 two weeks ago. Yet there is no assurance that Batchelder will actually launch a bid for the firm (financing could be a major problem, given the many retail takeover deals that have gone bust over the last year). He may just demand the chance to run it--and any turnaround could be a long time coming.
XEROX’S SAD HISTORY
Xerox has been one of the worst-performing big stocks of the past 20 years. Traders have made money on it at times, but as a long-term holding it has been a bomb.
Change vs. 1980 high
S&P; 500: +143%
Xerox: -24%
Thursday close: $55,125.
