Betting on a Xerox Transformation

 | Nov 20, 2012 | 11:00 AM EST  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

xrx

,

ibm

One of the great tech success stories of the last decade is IBM's (IBM) transformation from a hardware provider to a company that sells software and services. It had to leave behind decades of tradition, dump product lines (including personal computers) and change its culture to be successful. It was not an easy journey, but it was a rewarding one, including for shareholders as the stock price has more than doubled over the last decade and the company now gets less than 20% of overall revenues from hardware. Had it not undertaken changing its business model, it would have found itself in the same existential struggle as Hewlett-Packard (HPQ) and Dell (DELL) currently face. Both of these companies are trying to achieve a similar strategy now, but it might be too little, too late.

Moving from hardware to software and services provides several significant advantages to companies. These services are less cyclical, are more recurring, tend to have higher profit margins and require less capital investment than producing tangible products like mainframes or laptops. As IBM moved more to a software and services model, it was able to increase earnings even as overall revenues have remained flat for more than five years. In addition, it has been able to use the increased cash flow to reward shareholders by raising its dividend payouts and buying back more stock.

I hold out little hope for either Hewlett-Packard or Dell to achieve IBM's success in moving to a more service-oriented model. They are too far behind the curve at this point. But another corporate icon does seem to have fighting chance to transform its business model like IBM and that is Xerox (XRX). Xerox accelerated its move to a service model when it bought Affiliated Computer Services in 2010. It now gets more than half its revenue from services. I own the shares, as they are extremely cheap and the upside is substantial if Xerox can successfully get its effort over the goal line and drag this once-great American tech company to a new era.

Four more reasons XRX provides significant value at just over $6 a share:

  • Much like IBM, Xerox is using its cash flow to reward shareholders. It just raised its dividend payouts (beginning with the April distribution) and will now yield 3.6%. It also added $1 billion to its stock buyback authorization.
  • The stock is selling at the bottom of its five-year valuation range based on price/earnings, price/book, price/cash flow and price/sales ratios.
  • XRX sells for less than 6x forward earnings, more than 50% below its five-year average of 9.6.
  • The stock sells at just 67% of book value. Other than a few major banks, it is hard to find an S&P 500 stock selling at these levels.

Columnist Conversations

Lockheed Martin is fading into the close. The stock opened the session with a gap higher open after rep...
It's hard to argue with the price action or the momentum indicators, but volume, as reflected on the graph at ...
Time resistance to the current rally comes in between 4/22-24. Good reason to trail up stops on any longs! ...
Market continues to power higher going into the last hour of trading. Looking forward to earnings after the b...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.