Over The Long Term, You Will Surely Like This Company
Naomi is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you have taken the time to compare the history of Nokia (NYSE: NOK) and that of Xerox (NYSE: XRX), you will surely agree with me that these great companies have one or more things in common. In the first instance, these companies started out as manufacturers of high quality products. With Nokia leading the mobile phone industry, while Xerox was a name to be reckoned with in the manufacturing of copying machines and printers, alongside other peers like Hewlett Packard (NYSE: HPQ), which is not totally off the hook since the company has also had its fair share of highs and lows. In 2012 fiscal year alone, it suffered severe losses in two consecutive quarters which are related to acquisitions it made in the previous year and 2012. It has a 52 week high of $30.00 and 52 week low of $11.35
Nokia actually started with the Symbian handsets that were widely accepted and when it became evident that the company had to keep up with the ever changing consumer trend as far as mobile devices are concerned, it channeled its attention towards the production of Windows phones and completely ignored the production of newer versions of the Symbian handsets. Afterwards, it went further to re-brand its Nokia S40 into a smartphone which turned out to be Asha Touch. Then the Lumia range of smartphones came into existence and all these, just to make sure that the company does not lag behind in satisfying consumers in the mobile devices market. Yet, the company’s stock is trading at a low $3.99 while it struggles to keep its head up amidst stiff competition from other tech giants like Apple, Samsung and RIM.
Back to Xerox, as at the time the going was good, the market cap of the company was around $70 billion. When you compare that to its current market cap of around $9 billion, you will understand that a lot of air has gone out of Xerox’s sails. Although the company is still profitable, it is not facing the best of times as its revenue won’t stop declining even as it has huge debts that are yet to be taken care of. All these, added to the fact that currently the company’s PE ratio is nothing to write home about, have continued to cause great concern among investors. For the past five years, Xerox has maintained an average PE ratio of 19.1, with its current PE ratio at 7.8.
Starting from 2003, the revenue generated by this company was at $15.70 billion, $15.72 billion in 2004, $15.70 billion in 2005, $15.90 billion in 2006; all these showed that the company’s revenue remained flat through these years. However, between 2007 and 2008, the company’s revenue climbed up to $17.23 billion and $17.61 billion respectively. It was a different song, however, in 2009 as the company’s revenue declined to $15.18 billion as a result of the impact of the recession. The recession, however, seemed to have left the company stronger as the next year saw it reporting revenue of $21.63 billion in 2010 and $22.62 billion in 2011. For Q1, Q2 and Q3 of 2012 combined, the company generated revenue of $16.46 billion with an estimated $23 billion revenue for the current fiscal year.
Considering the fact that Xerox is currently trading at around $7.12, much should not be expected of the EPS as it is estimated to still remain at less than $1 by the end of this year. The company, in all sincerity, is yet to get there when it comes to turning its revenues into earnings and with the plans it currently has in diversifying its portfolio of offerings, the time for growth is closer than investors might think. With the printer and copying machine market getting fiercer by the day, gaining considerable market share has become a Herculean task because there are lots of reputable companies vying for it.
Knowing all this, Xerox took a positive step last year when it made additions to its color printers. This, in turn, made it possible for the company to further penetrate the printer market, reaching out to not just medium sized businesses but small businesses as well. Since most of the small business owners have limited finances, the possibility of maintaining long term commitment contracts with hardware providers is very minimal and this is where Xerox comes in. With the continued decline in the use of paper and ink in business establishments and increase in the sharing of documents electronically, it could spell trouble for printer and copying machine companies, but for Xerox, it spells little trouble.
The reason for this is that apart from offering printers and copying machines, the company also offers other valuable products that help businesses in the creation, editing and sharing of digital documents. Little wonder why the company did not hesitate in the acquisition of Affiliated Computer Services Inc. in 2010, a deal which saw the company churning out $6.4 billion and currently, the company has been able to increase its market share in business process, the main reason why it carried out the acquisition in the first place. From emerging reports, the annual revenue generated by ACS is more than the amount spent in the acquisition.
Also, envisaging that in a few years to come, there will be a visible decline in black and white printing and associated hardware, the company is already making plans to divest its portfolio offerings of those declining products and replacing them with growth oriented products. Xerox is also planning to spend not less than $400 million in buying back shares and also make an increase of 35% on dividend rate. This means that while it is servicing its debt, it will also be returning cash to shareholders which could be tricky but attainable.
Finally, talking about 2013, since the company has made it clear that it will be paying more attention to reorganization, much should not be expected as far as revenue growth is concerned, especially in comparison to the 2012 revenues. This means that for those investors seeking short term profits, Xerox is not for them but if you are on the train for long term, then this company is certainly the partner you need because by then, the company would have sorted out a good percentage of its debt and there would have been considerable growth in the world economy as against the recession that is being experienced now. Yes, in the long term, you will surely like this company.
Chizy has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!