Xerox a Deal at This Price; General Mills Serving Up Food for Thought

Xerox (XRX)

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Jim: We’re revisiting a stock we reviewed earlier, Mike, and, of course, you know Xerox well because of that book you wrote about the company. By the way, how long do we have to keep running your plug at the bottom of this column?

Mike: At least until my next book.

Jim: Anyway, Xerox is back in the news--for all the wrong reasons. But I won’t say I told you so.

Mike: Yes, I’m afraid I look at today’s chat as returning to the scene of the crime. When we last talked about Xerox’s stock (Sept. 28, 1999), you panned it and I recommended it. It’s the worst pick I’ve ever made. I guess a lot of knowledge is a dangerous thing.

Jim: But you have lots of company, because many thought Xerox was going to bounce back by now.

Mike: I feel much better. When we talked about Xerox last time, Rick Thoman had just been named chief executive. He came in with a lot of optimism that he was going to turn around the big ship. Well, Rick is gone now.

Jim: He lasted all of one year.

Mike: And he was succeeded by his predecessor, Paul Allaire. Allaire is struggling again too, with Xerox posting some really bad results lately. Its stock is now selling for less than $11 a share, which isn’t much above its net worth.

Jim: It’s almost as though the stock market is saying that, if we liquidated Xerox today, you wouldn’t get much more for your stock than . . .

Mike: If you took all of Xerox’s assets and sold them in my driveway on Sunday.

Jim: To be fair, as our colleague Tom Petruno noted, that net-worth figure is misleading. That’s because Xerox’s assets include such intangible items as the brains of its employees.

Mike: True. Xerox has some of the smartest engineers and scientists in the world. But that hasn’t kept its earnings from plunging. Expectations for Xerox are now about as low as they were for George Bush going into last week’s debate.

Jim: This stock traded around $60 in early 1999, so you can see how much it has lost. You could probably buy this company now for roughly $9 billion, which ain’t much when you realize we’re talking about Xerox here.

Mike: So let’s go over their problems.

Jim: Where do we start? Xerox can’t seem to move beyond its basic copier business into the digital office, it’s getting killed by competitors in copiers and printers, its sales force is defecting at an alarming rate, and questions abound about its management.

But I see Xerox’s biggest problem being that the company--for all its vaunted efforts to move into the digital age and become a provider of copiers, printers and so forth for the wired office--is still mainly a builder of stand-alone copiers.

Mike: I disagree. Xerox is no longer really a copier company. But I do concede that when it comes to its other products it has its job cut out. We’re talking about networking printing devices to other digital devices in the office, that type of thing. These are difficult businesses in which Xerox, despite having invented the digital technology more than 25 years ago, is an also-ran in terms of commercializing it.

Jim: Xerox shocked the world with another lousy quarter in the first three months of this year, then did it again in its second quarter. And two weeks ago, it really dropped a bombshell by saying it expects a loss in its third quarter and hinted it might slash or eliminate its dividend, which it has paid for more than 200 straight quarters.

Sure enough, Xerox did just that Monday: It cut its quarterly dividend to 5 cents a share from 20 cents, to save $400 million a year.

That’s another reason we’ve got a stock selling for less than $11.

Mike: Isn’t it ironic? For a long time people hunting for promising stocks would repeat the adage that “they hoped to find the next Xerox,” which is to say an unheralded stock that turned its owners into millionaires. But companies that might once have looked like the next Xerox can easily end up like today’s Xerox. Are you listening, Microsoft? Anyway, what do you think of Xerox’s stock now, Jim?

Jim: This might surprise you, given everything I’ve said, but I think Xerox is a screaming buy.

Mike: Xerox has left me screaming for a long time now, but guess what? I agree.

Jim: I don’t think Xerox can go much lower, and I see two things happening that will help the stock. Either Allaire or his successor will dramatically restructure Xerox--again. Or Xerox will get taken out. I don’t know which company might want to buy it, but at this price Xerox’s talented work force and its incredible brand recognition have to appeal to someone. Things can hardly get worse.

Mike: My personal rule is that things can always get worse. But I agree. I don’t know what will happen with Xerox, or how it’s going to get out of this deep slump. But it’s hard to believe that whatever it is, it will happen at a higher price than $10 a share. It may be a bumpy ride, but at this price Xerox is a buy.

General Mills (GIS)

Jim: Don’t buy

Mike: Buy

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Mike: Now here’s a company that I gather is intent on turning everything we eat into something resembling the food the astronauts got in “2001: A Space Odyssey.” That is, stuff you eat out of a tube.

Jim: It has to be either in a tube or a pouch.

Mike: We’re talking about General Mills, the Minneapolis food company that makes everything that can be mashed, rolled up, squeezed, whisked and spooned. Sounds like the diet we’re all going to get when we’re 90.

Jim: This company is well-known for its cereals, which include Cheerios and Wheaties, and it makes a variety of baking products under the Betty Crocker label.

Mike: I think we also should acknowledge General Mills’ achievement in inventing an entirely new category of food. That is the food extender, namely Hamburger Helper, which is a soy product that you can cook into your hamburger and make 1 pound into 2. It’s hard to believe that in this prosperous day and age people still buy Hamburger Helper.

Jim: There’s a good reason why they do.

Mike: Why?

Jim: Because Hamburger Helper isn’t a matter of prosperity. It’s a matter of how much time people have at their disposal.

Mike: How does Hamburger Helper cut the time it takes to make a hamburger?

Jim: Because there is a difference between making a hamburger and making a larger meal for a group of people, say, if you’re providing dinner for your family. The point is General Mills has had accolades over the last few years because under the direction of its chief executive, Steve Sanger, it has become adept at creating foods that are convenient. His motto is to make food you can eat “one-handed.” So we end up with a lot of products that people can eat on the go. Yogurt in a tube, and so on.

Mike: Now, if you have a tube of yogurt in one hand and your cell phone in the other, then what are you using to drive the car?

Jim: We’re not talking about the car so much as your kitchen. People don’t like spending much time in front of the stove anymore. Sanger has been coming up with a variety of products, whether it’s cereals that he’s trying to squeeze into . . . Hey! I’m serious.

Mike: I know you’re serious.

Jim: You laughed!

Mike: No, I retched. You’re mistaking one sound for the other.

Jim: Just think, we’re going to have a whole generation growing up that has never used a spoon. Anyway, Sanger’s also got a variety of ready-to-eat barbecued meats, and rice and pasta dishes that you add water to and throw in the microwave. To top it all off, General Mills recently bought Pillsbury, also based in Minneapolis, and the word is that Sanger’s anxious to take a lot of Pillsbury’s well-known brands and do the exact same thing to them.

Mike: Mash them up, bind them up, stick them in backpacks.

Jim: Exactly. Pillsbury has a lot of big brands that could be repackaged, including Green Giant can vegetables, Progresso soups . . .

Mike: Here’s an idea. How about Green Giant string beans in a tube? General Mills is the company that created Go-Gurt, which it calls portable yogurt. Which suggests that the conventional little cup of yogurt we used to buy is something that gets bolted to a table. I mean, wasn’t yogurt already portable enough?

Jim: Apparently not, because Go-Gurt is now the best-selling yogurt in the country. The fact of the matter is that the food business in this country now, even for relatively strong companies such as General Mills, is very tough. The wave of mergers in the supermarket industry has created a few giant grocery chains that hold enormous clout and buying power. So it has been very hard for big food companies to make money. Just look at Kellogg.

Mike: On the other hand, as hard as it is to make money at it, General Mills makes a lot of money at it.

Jim: Right. General Mills is known as one of the most prosperous of its group. However, if you look at the price of its stock, it merely hasn’t done as badly as everybody else’s, which isn’t saying much.

Mike: I think General Mills is a buy.

Jim: Oh, I don’t. I wouldn’t touch the stock.

Mike: You’re kidding. After all you just rattled off about the company’s successes? People have to eat, and the fact that they’re willing to eat some of this stuff is impressive. Plus, General Mills’ stock is undervalued.

Jim: It is undervalued.

Mike: So what’s your problem?

Jim: My problem is that investors have very little interest in food companies, and they haven’t for some time.

Mike: What better time to buy a stock than when it looks as if no one cares? We’re not talking about a company whose future is in doubt, like Xerox. We’re talking about a company that hits its earnings numbers without fail every time and often exceeds everybody’s forecasts.

Jim: Isn’t that swell? General Mills has been doing it for the last two years, and its stock is up all of 7% in that time, versus a 43% jump in the S&P; 500 index.

Mike: Time to buy.

Jim: Don’t get me wrong. I think General Mills is an excellent company. It’s strongly profitable, and Sanger is ahead of his peers in terms of front-running consumers’ changing tastes and needs when it comes to eating.

Mike: If you call it “eating.” I call it “extruding and absorbing.” But I still like the stock.

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Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age” (HarperBusiness). Either can also be reached at Business Section, 202 W. 1st St., Los Angeles, CA 90012.

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).