Heydays Could Be Over, but Xerox and Avon May Be on Sale

Stock Exchange lets readers listen in as Times staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.

Xerox (XRX)

Jim: Well, Mike, here’s a company you actually know a little something about.

Mike: Finally!

Jim: Xerox, of course, is the famed maker of copiers and printers. But to me, Xerox also stands out as being the one Fortune 500 company that always seems to be undertaking one restructuring after another. It’s in constant turmoil.

Mike: It’s Xerox’s legacy, really. As a former Xerox executive told me while I was researching my new book about Xerox’s Palo Alto Research Center, “Dealers of Lightning.”

Jim: Boy, you never miss a chance to plug, do you?

Mike: You asked for it. Anyway, he said Xerox has been eternally cursed by the legacy of Chester Carlson.

Jim: Who?

Mike: The inventor of dry-paper xerography, which was the basis of what, at the time, was the most successful industrial product ever launched: the original Xerox 914 copier. Though it took 14 years to bring the 914 to fruition, it was a great technical idea that lived up to all of its expectations.

Jim: So much so that Xerox became part of the vernacular, a verb for making copies.

Mike: Right, but in fact Xerox never recovered from that success, or from the feeling that great technological advances find their markets instantaneously.

Jim: Meaning?

Mike: Meaning it doesn’t always need to take 10, 15 years to nurture along new products. Xerox at one time believed it shouldn’t be in any business that wasn’t a $100-million business, but it forgot that to get to $100 million some businesses have to first be $1 million.

Jim: As much as I hate to plug your book again, it’s true that Xerox developed a lot of technology that we now take for granted, but didn’t bring them to market because they were considered insignificant--things like the personal computer and the graphical user interface.

Mike: Now, I’ve been accused of letting Xerox off easy because I wrote that you can’t really blame Xerox for letting a lot of its past inventions go by.

Jim: Why not?

Mike: Because nobody, including International Business Machines, knew how big these markets would become. And since Xerox had 125,000 copier salespeople on its staff, it was not well-positioned to shift gears and start selling these strange new machines, desktop computers.

Jim: Well, let’s look at Xerox’s more recent history. To its credit, some of its restructurings have paid off. For instance, Xerox got hammered in the late 1980s when the Japanese tore into its market for low-priced copiers. But Xerox bounced back this decade by focusing on high-end copiers that carry the fattest profit margins. And the stock followed suit.

Mike: And now Xerox is really trying to incorporate digital technology, which it once treated as a poor relation, and develop its products around it.

Jim: Right, it’s trying to link copiers and printers and fax machines to the digitally wired office.

Mike: That’s why I think things are beginning to look up for Xerox. As a corporate bureaucracy, it’s learned a lot of lessons and is doing a better job at finding ways to capture the value in some of the technological advances that it’s developed itself.

Jim: Xerox is a mixed bag for me. What I like is that Xerox, through its various overhauls, has really boosted its profit margin. It’s now around 9 cents per dollar of sales after tax, or double what it was in the early ‘90s. But Xerox also is far too debt-heavy, which isn’t helping its effort to keep costs down. Plus, it still faces tremendous competition from the likes of Canon and Hewlett-Packard. And finally, it seems Xerox is still mostly outside the digital world looking in.

Mike: I agree with much of that, Jim, but Xerox is poised to become an important digital-copier company. They took a major swipe at Hewlett-Packard last week when they announced plans to buy the color-printing division of Tektronix Inc. for nearly $1 billion. And Xerox’s stock is relatively cheap.

Jim: That’s one reason I wouldn’t buy the stock.

Mike: Because it’s cheap?

Jim: Because Wall Street is telling us something--that it has tremendous skepticism about Xerox’s growth prospects.

Mike: Is that always the way to bet?

Jim: Of course not. But here I think it is. The stock is selling in the low 40s, which is well below its 52-week high and only 16 times Xerox’s expected ’99 earnings per share. Boy, is that some change from Xerox’s heyday as a blue-chip giant?

Mike: Well, I think it makes a buying opportunity, and this latest effort by Xerox might actually pan out.

Jim: Not me. But either way, I hope you sell a few more books.

Avon Products (AVP)

Jim: Up next is Avon Products, and there’s been two major events in the last two years at this famed direct seller of cosmetics and other gifts.

Mike: One of which is that the Avon lady didn’t come calling, so to speak.

Jim: Right. In late 1997 the company needed a new chief executive, and speculation ran high that it would finally pick a woman. Instead, the board chose a man, one Charles Perrin, who had run the Duracell battery company. Avon did name a woman, Andrea Jung, as president and Perrin’s likely successor, but the move did not go over well in many circles.

Mike: Now, at the risk of leading with my chin, I think Perrin’s selection was a very good sign for this company. The pressure was on Avon to do essentially the politically correct thing ... . .

Jim: . . . at a time it was really struggling, by the way.

Mike: Right, and the board thought long and hard about it. But it decided that it was worth the political heat to pass over some of the leading female candidates because they did not yet have the proper seasoning. So the board went with a highly experienced CEO who knows marketing and sales.

Jim: And this is a board that has several women.

Mike: Avon probably has among the highest percentage of women on its board of any corporation in America. And they stood up and took it, and I think they made the right call.

Jim: Well, it seems that way so far. Perrin got this company back on track.

Mike: Right, the stock doubled in price during his first 18 months at the helm, though it’s tailed off this summer.

Jim: That was the second major event. In late 1997, this company--which does about $5 billion in annual sales--was having all sorts of problems overseas, particularly in Asia and Brazil. But Perrin slashed costs and tried to narrow down Avon’s product line, and he’s got Avon’s earnings growing again in double digits.

Mike: Now, though, Avon is going to be walking several tightropes at once. For starters, it needs to rethink how it sells its goods. After all, this is a company that’s famous for direct selling .... .

Jim: .... . thanks to the Avon lady. There’s something like 1.7 million of them around the world.

Mike: Right, but obviously her time has passed, because we don’t all live in rural communities anymore. And even in suburbia, it’s no sweat to drive to the corner drugstore to get your cosmetics. Er, so I understand.

Jim: Or to the local mall, where the big department stores have huge cosmetics counters.

Mike: Plus, Avon is trying to remake its entire product line to be more upscale and thus more in demand.

Jim: More trendy too. Now, Avon’s overseas business will come back, but I’d still pass on this stock. As you said, Michael, it more than doubled in price to a high of $60 a share in April, but it’s now dropped to the high 30s, or about 21 times expected ’99 earnings per share.

Mike: That’s not overly expensive.

Jim: No, but here’s my problem: Sales-wise, Avon is not growing. The company’s sales are edging up only 2% to 4% a year; that’s barely keeping up with inflation. Even worse, its U.S. sales are flat, because Avon still has not figured out how to convince enough women to buy its goods, whether it be from selling door-to-door or from some other marketing method. It’s probably a perception problem of Avon being an outdated provider, or Avon’s products not being hip enough, or both.

Mike: I agree. This company is in the middle of a balancing act, and the balls could drop in any direction. Have I mixed enough metaphors? But I think Avon is cheap enough, and Perrin skilled enough, to be worth the investment.

Jim: Avon needs a huge make-over, excuse the pun, but we don’t know how it’s going to turn out. And even the stock’s recent drop in price isn’t enough to convince me to buy in.

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Write or e-mail with a stock you would like to see discussed in this column. James Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Michael Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the new book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age.” Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.

You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

XEROX, Monday: $42.00

AVON PRODUCTS, Monday: $36.06